<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(ARIZONA SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Arizona Series) (the "Series") is
one of seventeen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from Arizona State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations which, in the opinion of the Fund's investment adviser, are of
comparable quality. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Arizona Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered to be a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Arizona Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Arizona State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Arizona
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay income exempt, in the opinion of counsel, from Arizona State
and federal income taxes (Arizona Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Arizona Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Arizona Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 11.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 30.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 17 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
-Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
-Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
-Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 25.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 18.
3
<PAGE>
FUND EXPENSES
(ARIZONA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Management Fees............................... .50% .50% .50%
12b-1 Fees.................................... .10++ .50 .75++
.29 .29 .29
Other Expenses................................
.89% 1.29% 1.54%
Total Fund Operating Expenses.................
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A............................................................................... $ 39 $ 58 $ 78 $ 136
Class B............................................................................... $ 63 $ 71 $ 81 $ 139
Class C............................................................................... $ 26 $ 49 $ 84 $ 183
You would pay the following expenses on the same investment, assuming no redemption:
Class A............................................................................... $ 39 $ 58 $ 78 $ 136
Class B............................................................................... $ 13 $ 41 $ 71 $ 139
Class C............................................................................... $ 16 $ 49 $ 84 $ 183
The above example with respect to Class A and Class B shares is based on restated data for the Series' fiscal year ended August
31, 1994. The above example with respect to Class C shares is based on expenses expected to have been incurred if Class C
shares had been in existence during the entire fiscal year ended August 31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in the Series
will bear, whether directly or indirectly. For more complete descriptions of the various costs and expenses, see "How the Fund
is Managed." "Other Expenses" includes operating expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agency and custodian fees.
<FN>
----------------
* Class B shares will automatically convert to Class A shares approximately seven years after purchase. See
"Shareholder Guide--Conversion Feature-- Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares of the Series may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation is imposed on each class of the
Series rather than on a per shareholder basis. Therefore, long-term shareholders of the Series may pay more
in total sales charges than the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that the Fund may pay a
distribution fee of up to .30 of 1% and 1% per annum of the average daily net assets of the Class A and
Class C shares, respectively, the Distributor has agreed to limit its distribution fees with respect to the
Class A and Class C shares of the Series to no more than .10 of 1% and .75 of 1% of the average daily net
asset value of the Class A shares and Class C shares, respectively, for the fiscal year ending August 31,
1995. Total Fund Operating Expenses of the Class A and Class C shares without such limitations would be
1.09% and 1.79%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class A share
of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. This
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------
YEAR ENDED AUGUST 31, JANUARY 22, 1990*
------------------------------------- THROUGH
1994 1993 1992 1991 AUGUST 31, 1990
------- ------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 12.44 $ 11.88 $ 11.32 $ 10.80 $10.99@
------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------
Net investment income........................ .65 .67 .68 .69 .42
(.72) .68 .56 .52 (.19)@
Net realized and unrealized gain (loss) on
investment transactions.....................
------- ------- ------- ------- ------
Total from investment operations......... (.07) 1.35 1.24 1.21 .23@
------- ------- ------- ------- ------
LESS DISTRIBUTIONS
- ---------------------------------------------
Dividends from net investment income......... (.65) (.67) (.68) (.69) (.42)
Distributions from net realized gains........ (.13) (.12) -- -- --
------- ------- ------- ------- ------
Total distributions...................... (.78) (.79) (.68) (.69) (.42)
------- ------- ------- ------- ------
Net asset value, end of period............... $ 11.59 $ 12.44 $ 11.88 $ 11.32 $10.80
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN+:............................... (.59)% 11.79% 11.23% 11.45% 2.01%@
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $ 7,675 $ 6,622 $ 2,146 $ 1,508 $ 436
Average net assets (000)..................... $ 7,141 $ 3,613 $ 1,758 $ 937 $ 260
Ratios to average net assets:
Expenses, including distribution fee....... .89% .92% 1.02% 1.02% .96%**
Expenses, excluding distribution fee....... .79% .82% .92% .92% .86%**
Net investment income...................... 5.40% 5.58% 5.81% 6.13% 6.36%**
Portfolio turnover........................... 33% 14% 42% 25% 49%
<FN>
--------------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends.
Total returns for periods of less than a full year are not annualized.
@Restated.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1994, have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class B share
of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. This
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------
SEPTEMBER 24,
1984*
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $ 10.73 $ 10.81 $ 11.70 $ 10.59 $ 10.00
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------
Net investment income.... .60 .62 .63 .64 .65 .67 .70+ .71+ .80+ .76+
Net realized and
unrealized gain (loss)
on
investment
transactions............ (.73) .69 .55 .52 (.17) .24 (.08) (.51) 1.18 .59
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.......... (.13) 1.31 1.18 1.16 .48 .91 .62 .20 1.98 1.35
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
- -------------------------
Dividends from net
investment income....... (.60) (.62) (.63) (.64) (.65) (.67) (.70) (.71) (.80) (.76)
Distributions from net
realized gains.......... (.13) (.12) -- -- -- -- -- (.38) (.07) --
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total
distributions....... (.73) (.74) (.63) (.64) (.65) (.67) (.70) (1.09) (.87) (.76)
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period.................. $ 11.58 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $ 10.73 $ 10.81 $ 11.70 $ 10.59
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
--------- ------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN+++:......... (1.08)% 11.42% 10.68% 11.02% 4.49% 8.88% 6.03% 1.73% 20.32% 13.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $52,104 $57,286 $51,697 $57,209 $59,216 $59,266 $51,642 $50,344 $40,278 $18,963
Average net assets
(000)................... $55,526 $53,656 $53,477 $58,973 $60,359 $55,479 $50,692 $47,612 $31,088 $10,497
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.29% 1.32% 1.42% 1.41% 1.30% 1.30% 1.23%+ 1.16%+ 1.12%+ 1.02%+**
Expenses, excluding
distribution fee...... .79% .82% .92% .91% .82% .83% .76%+ .67%+ .63%+ .54%+**
Net investment
income................ 5.40% 5.18% 5.42% 5.77% 5.99% 6.26% 6.60%+ 6.27%+ 6.81%+ 7.59%+**
Portfolio turnover....... 33% 14% 42% 25% 49% 62% 66% 50% 43% 54%
<FN>
--------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated
period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class C share
of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the period indicated. This
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-----------------
AUGUST 1,
1994*
THROUGH
AUGUST 31,
1994
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.60
------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income................... .04
(.02)
Net realized and unrealized loss on
investment transactions................
------
Total from investment operations.... .02
------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends from net investment income.... (.04)
------
Net asset value, end of period.......... $ 11.58
------
------
TOTAL RETURN+:.......................... .10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period............... $ 200
Average net assets...................... $ 199
Ratios to average net assets:#
Expenses, including distribution
fee.................................. 1.90%**
Expenses, excluding distribution
fee.................................. 1.14%**
Net investment income................. 6.34%**
Portfolio turnover...................... 33%
<FN>
--------------------
* Commencement of offering of Class C shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of the period reported and includes reinvestment of
dividends. Total return is not annualized.
# Because of the event referred to in * and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A or
B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE ARIZONA SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM ARIZONA STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN ARIZONA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM ARIZONA STATE AND FEDERAL INCOME TAXES
(ARIZONA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Arizona law, dividends paid by the Series are exempt from
Arizona income tax for resident individuals and corporations to the extent they
are derived from interest payments on Arizona Obligations. Arizona Obligations
could include general obligation bonds of the State, counties, cities, towns,
etc., revenue bonds of utility systems, highways, bridges, port and airport
facilities, colleges, hospitals, etc., and industrial development and pollution
control bonds. The Series will invest in long-term obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for
8
<PAGE>
them. An inverse floater is a debt instrument with a floating or variable
interest rate that moves in the opposite direction of the interest rate on
another security or the value of an index. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL ARIZONA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Arizona Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Arizona Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Arizona Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN ARIZONA OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that at least 80% of the income will be exempt from Arizona State
and federal income taxes or the Series will have at least 80% of its total
assets invested in Arizona Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper, and general
obligation and revenue notes, or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Arizona Obligations or may invest
its assets so that more than 20% of the income is subject to Arizona State or
federal income taxes. The Series will treat an investment in a municipal bond
refunded with escrowed U.S.
9
<PAGE>
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON ARIZONA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Arizona Obligations held by the Series reduces credit
risk by providing that the
10
<PAGE>
insurance company will make timely payment of principal and interest if the
issuer defaults on its obligation to make such payment, it does not afford
protection against fluctuation in the price, I.E., the market value, of the
municipal obligations caused by changes in interest rates and other factors, nor
in turn against fluctuations in the net asset value of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation
11
<PAGE>
margin requirements at a time when it might be disadvantageous to do so. The
inability to close futures positions also could have an adverse impact on the
ability of the Series to hedge effectively. There is also a risk of loss by the
Series of margin deposits in the event of bankruptcy of a broker with whom the
Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN ARIZONA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
ARIZONA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF ARIZONA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Slow revenue growth
in recent years and a tremendous increase in expenditure growth for health and
welfare and prisons have eroded Arizona's financial flexibility. State budget
efforts for fiscal year 1993-1994 focused on business tax cuts that raised
concerns that the State may be undercutting its tax base. Nevertheless, the
State had a budget surplus of $86 million for fiscal year 1992-1993 and a
surplus of $210.6 million for fiscal year 1993-1994. For fiscal year 1994-1995,
a surplus of $58.4 million is projected. In addition, voter approval in November
1992 of Proposition 108, which requires a two-thirds majority in both houses of
the legislature to pass tax or fee increases, has substantially constrained the
State's ability to raise revenues. If either Arizona or any of its local
governmental entities is unable to meet its financial obligations, the income
derived by the Series, the ability to preserve or realize appreciation of the
Series' capital and the Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
12
<PAGE>
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .89%, 1.29% and 1.90% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
13
<PAGE>
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Christian Smith, an Investment
Associate of Prudential Investment Advisors. Mr. Smith has responsibility for
the day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
14
<PAGE>
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 or 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $7,141
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $63,200 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $349,500 under the Class B Plan and
received $277,628 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $76,800 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
15
<PAGE>
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
16
<PAGE>
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent
17
<PAGE>
deferred sales charges. Neither "average annual" total return nor "aggregate"
total return takes into account any federal or state income taxes which may be
payable upon redemption. The Fund also may include comparative performance
information in advertising or marketing the shares of the Series. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. The Fund will include performance data for each class
of shares of the Series in any advertisement or information including
performance data of the Series. Further performance information is contained in
the Series' annual and semi-annual reports to shareholders, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested
18
<PAGE>
and regardless of the length of time a shareholder has owned his or her shares.
The maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Arizona law, dividends paid by the Series are exempt from Arizona income
tax for individuals who reside in Arizona and for corporations that are subject
to such tax to the extent such dividends are exempt from federal income tax
(except for possible application of the alternative minimum tax) and are derived
from interest payments on Arizona Obligations.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same
19
<PAGE>
day and will be in the same amount except that each class will bear its own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares. Distributions of net capital gains, if any, will be paid in the
same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P. O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to
20
<PAGE>
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest of each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
21
<PAGE>
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
22
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
--------------------------------------------- --------------------- --------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of the .30 of 1% (currently Initial sales charge waived or
public offering price being charged at a reduced for certain purchases
rate of .10 of 1%)
CLASS B Maximum contingent deferred sales charge or .50 of 1% Shares convert to Class A shares
CDSC of 5% of the lesser of the amount approximately seven years after
invested or the redemption proceeds; declines purchase
to zero after six years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being Shares do not convert to another
amount invested or the redemption proceeds on charged at a rate of class
redemptions made within one year of purchase .75 of 1%)
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
23
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE SALES CHARGE DEALER
AS PERCENTAGE AS PERCENTAGE CONCESSION AS
OF OFFERING OF AMOUNT PERCENTAGE OF
AMOUNT OF PURCHASE PRICE INVESTED OFFERING PRICE
- ------------------------- -------------- -------------- ---------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial
24
<PAGE>
adviser's employment at Prudential Securities, (ii) the purchase is made with
proceeds of a redemption of shares of any open-end, non-money market fund
sponsored by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) on which no deferred
sales load, fee or other charge was imposed on redemption and (iii) the
financial adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
25
<PAGE>
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
26
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- ----------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
27
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
28
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of
29
<PAGE>
Class B or Class C shares and (3) amounts representing Class B or Class C shares
held beyond the applicable CDSC period. Class B and Class C share holders must
notify the Transfer Agent either directly or through Prudential Securities or
Prusec that they are eligible for this special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
30
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities
Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund,
Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund,
Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources
Fund, Inc.
Prudential Intermediate Global Income
Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income
Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend
Disbursing Agent............................. 16
HOW THE FUND VALUES ITS SHARES.................. 17
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 18
GENERAL INFORMATION............................. 20
Description of Shares......................... 20
Additional Information........................ 21
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 25
Conversion Feature--Class B Shares............ 28
How to Exchange Your Shares................... 29
Shareholder Services.......................... 30
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF117A 444048O
Class A: 74435M-10-1
CUSIP Nos.: Class B: 74435M-20-0
Class C: 74435M-59-8
PROSPECTUS
December 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(ARIZONA SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(CONNECTICUT MONEY MARKET SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Connecticut Money Market Series)
(the "Series") is one of seventeen series of an open-end, management investment
company, or mutual fund. This Series is non-diversified and is designed to
provide the highest level of current income that is exempt from Connecticut
State and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term,
tax-exempt Connecticut State, municipal and local debt obligations and
obligations of other qualifying issuers. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the
Connecticut Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated December 30, 1994, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the Connecticut Money Market
Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from Connecticut State and federal income
taxes consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term Connecticut
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
Connecticut State and federal income taxes (Connecticut Obligations). There
can be no assurance that the Series' investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive it if sold such security. See "How
the Fund Values its Shares" at page 13.
In seeking to achieve its investment objective, the Series will invest
primarily in Connecticut Obligations. This degree of investment
concentration makes the Series particularly susceptible to factors adversely
affecting issuers of Connecticut Obligations. The Series is non-diversified
so that more than 5% of its total assets may be invested in the securities
of one or more issuers. Investment in a non-diversified portfolio involves
more risk than investment in a diversified portfolio. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page
9.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1994,
PMF served as manager or administrator to 68 investment companies, including
38 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 10.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' shares. The Fund currently reimburses PMFD for expenses
related to the distribution of the Series' shares at an annual rate of up to
.125 of 1% of the average daily net assets of the Series. See "How the Fund
is Managed--Distributor" at page 11.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 23.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Fund through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at the net asset
value per share (NAV) next determined after receipt of your purchase order
by the Transfer Agent or Prudential Securities. See "How the Fund Values its
Shares" at page 13 and "Shareholder Guide-- How to Buy Shares of the Fund"
at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(CONNECTICUT MONEY MARKET SERIES)
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................................ None
Maximum Sales Load Imposed on Reinvested Dividends..................... None
Deferred Sales Load.................................................... None
Redemption Fees........................................................ None
Exchange Fee........................................................... None
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Management Fees (Before Waiver)........................................ .500%
12b-1 Fees............................................................. .125%
Other Expenses......................................................... .317%
-----
Total Fund Operating Expenses (Before Waiver).......................... .942%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ---------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:......... $10 $30 $52 $116
The above example is based on restated data for the Series' fiscal year ended August 31, 1994.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various costs and
expenses that an investor in the Series will bear, whether directly or indirectly. For more
complete descriptions of the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian fees.
<FN>
------------------
* Based on expenses incurred during the fiscal year ended August 31, 1994,
without taking into account the management fee waiver. At the current level of
management fee waiver (75%), Management Fees and Total Fund Operating Expenses
would be .10% and .542%, respectively, of the Series' average net assets. See
"How the Fund is Managed--Manager-- Fee Waivers and Subsidy."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, AUGUST 5, 1991*
--------------------------------------- THROUGH
1994 1993 1992 AUGUST 31, 1991
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- -------
Net investment income and net realized gains+......... .020 .022 .034 .003
Dividends and distributions to shareholders........... (.020) (.022) (.034) (.003)
----------- ----------- ----------- -------
Net asset value, end of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- -------
----------- ----------- ----------- -------
TOTAL RETURN++:....................................... 2.02% 2.20% 3.42% 0.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $ 54,302 $ 57,794 $ 40,480 $10,904
Average net assets (000).............................. $ 60,594 $ 53,152 $ 33,964 $ 6,730
Ratios to average net assets+:
Expenses, including distribution fee................ .542% .387% .125% .125%**
Expenses, excluding distribution fee................ .417% .262% .00% .00%**
Net investment income............................... 1.99% 2.17% 3.20% 4.42%**
<FN>
- --------------
*Commencement of investment operations.
**Annualized.
+Net of expense subsidy and/or management fee waiver.
++Total return is calculated assuming a purchase of shares on the first day and
a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING AND ITS "TAX-EQUIVALENT
YIELD." Tax-equivalent yield shows the taxable yield an investor would have to
earn from a fully taxable investment in order to equal the Series' tax-free
yield after taxes and is calculated by dividing the Series' current or effective
yield by the result of one minus the State tax rate times one minus the federal
tax rate. The following is an example of the yield calculations as of August 31,
1994:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $ 1.000425748
Value of hypothetical account at beginning of period........... 1.000000000
------------
Base period return............................................. $ .000425748
------------
------------
CURRENT YIELD (.000425748 X (365/7))+.......................... 2.22%
EFFECTIVE ANNUAL YIELD, assuming daily compounding+............ 2.24%
TAX-EQUIVALENT CURRENT YIELD (2.22% DIVIDED BY (1 -
42.32%))+..................................................... 3.85%
<FN>
- --------------
+After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax-equivalent yield would have been 1.85%, 1.86% and 2.94%,
respectively. See "Manager" in the Statement of Additional Information.
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1994 was 77 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/ Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE CONNECTICUT MONEY MARKET
SERIES (THE SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO
PROVIDE THE HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM CONNECTICUT
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF
CAPITAL. THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN SHORT-TERM CONNECTICUT STATE, MUNICIPAL AND LOCAL GOVERNMENT
OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED
IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE
OPINION OF COUNSEL, FROM CONNECTICUT STATE AND FEDERAL INCOME TAXES (CONNECTICUT
OBLIGATIONS). SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THE STATEMENT OF
ADDITIONAL INFORMATION. THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
6
<PAGE>
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Connecticut law, distributions from the Series to
individual shareholders of the 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 are
excluded from gross income for federal income tax purposes as exempt-interest
dividends and are derived from interest payments on Connecticut Obligations. It
is likely that capital gain dividends derived from the sale of Connecticut
Obligations also are not subject to taxation pursuant to the Connecticut
Personal Income Tax. Other types of distributions received from the Series,
including distributions of interest on, and capital gain dividends derived from
sales of, obligations issued by other issuers, are subject to the Connecticut
Personal Income Tax. Certain shareholders may also be subject to Connecticut
alternative minimum tax with respect to distributions from the Series. See
"Taxes, Dividends and Distributions." The Connecticut Obligations in which the
Series may invest include certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and certain variable and floating rate demand notes. See
"Investment Objectives and Policies--Tax-Exempt Securities--Tax-Exempt Notes" in
the Statement of Additional Information. The Series will maintain a
dollar-weighted average maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION. There is no limit on the amount of such
securities that the Series may purchase. Floating rate securities normally have
a rate of interest which is set as a specific percentage of a designated base
rate, such as the rate on Treasury Bonds or Bills or the prime rate at a major
commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL CONNECTICUT OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
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) OR (II) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY
THE INVESTMENT ADVISER UNDER THE SUPERVISION OF THE TRUSTEES. See "Description
of Tax-Exempt Security Ratings" in the Statement of Additional Information. The
investment adviser will monitor the credit quality of securities purchased for
the Series' portfolio and will limit its investments to those which present
minimal credit risks.
In selecting Connecticut Obligations for investment by the Series, the
investment adviser considers ratings assigned by major rating services,
information concerning the financial history and condition of the issuer and its
revenue and expense prospects and, in the case of revenue bonds, the financial
history and condition of the source of revenue to service the bonds. If a
Connecticut Obligation held by the Series is assigned a lower rating or ceases
to be rated, the investment adviser under the supervision of the Trustees will
promptly reassess whether that security presents minimal credit risks and
whether the Series should continue to hold the security in its portfolio. If a
portfolio security no longer presents minimal credit risks or is in default, the
Series will dispose of the security as soon as reasonably practicable unless the
Trustees determine that to do so is not in the best interests of the Series and
its shareholders.
7
<PAGE>
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the Securities and Exchange Commission (SEC). See "How the
Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MUNICIPAL OBLIGATIONS WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAXES. As a matter of fundamental policy,
during normal market conditions the Series' assets will be invested so that at
least 80% of its total assets will be invested in municipal securities which pay
income exempt from federal income taxes. These primarily will be Connecticut
Obligations, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Connecticut Obligations that also meet the
Series' credit quality and average weighted maturity requirements, to purchase
Connecticut Obligations. To the extent the Series invests in obligations other
than Connecticut Obligations, dividends derived therefrom likely will not be
exempt from Connecticut taxes. During abnormal market conditions or to provide
liquidity, the Series may hold cash or taxable cash equivalents such as
certificates of deposit, bankers' acceptances and time deposits or other
short-term taxable investments such as repurchase agreements, or high grade
taxable obligations. When, in the opinion of the investment adviser, abnormal
market conditions require a temporary defensive position, the Series may invest
its assets so that more than 20% of the income is subject to federal income
taxes.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) 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 (b) if only one
such rating organization assigned a rating, by that rating organization; 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 two
highest quality grades; or (3) the put is backed by a letter of credit or
similar financial guarantee issued by a person having securities outstanding
which are rated within the two highest quality grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment of the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase; the purchase price for such securities
includes interest accrued during the period between purchase and settlement, and
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held
8
<PAGE>
by the Series. If the seller defaults in the sale, the Series could fail to
realize the appreciation, if any, that had occurred. The Series will establish a
segregated account with its Custodian in which it will maintain cash and liquid,
high-grade debt obligations equal in value to its commitment for when-issued or
delayed delivery securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CONNECTICUT OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Connecticut Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN CONNECTICUT OBLIGATIONS AND
BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM CONNECTICUT OBLIGATIONS, IT IS
MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF CONNECTICUT
OBLIGATIONS THAN IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. An investment in the Series
therefore may involve more risk than an investment in other types of money
market funds. Recent economic difficulties have resulted in severe fiscal stress
in Connecticut, culminating with a General Fund deficit of $965 million at the
close of fiscal year 1991 and the subsequent issuance of a like amount of
Economic Recovery Notes which are being repaid over a five year period. In
fiscal year 1992, the State took a number of actions to raise revenues, reduce
expenditures, and establish a broader revenue base aimed at reducing the
volatility of its budgetary operations. Chief among these were the
implementation of a 4.5% personal income tax and the broadening of the sales tax
base, which was coupled with a decrease in the sales tax rate from 8% to 6% and
a decrease in the Corporation Business Tax from 13.8% in 1991 to 12.65% in 1992,
11.5% in 1993 and gradually decreasing to 10% for years beginning in 1998. These
actions, along with conservative revenue projections, allowed the State to
achieve modest surpluses for fiscal years 1992, 1993 and 1994, a sharp contrast
to the previous four fiscal years, all of which ended in deficits. Nevertheless,
defense spending cuts and unemployment continue to strain the State's fiscal
operations as the economy in the northeast recovers from the recession. If
either Connecticut or any of its local governmental entities is unable to meet
its financial obligations, the income derived by the Series, the ability to
preserve the Series' capital and the Series' liquidity could be adversely
affected.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines,
9
<PAGE>
the Series may incur a loss. The Series participates in a joint repurchase
account with other investment companies managed by Prudential Mutual Fund
Management, Inc. pursuant to an order of the SEC. See "Investment Objectives and
Policies-- Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may invest up to 10% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such restricted
securities under the supervision of the Trustees. See "Investment Objectives and
Policies--Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of its average net assets were .542%. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid a
management fee of .10 of 1% of the Series' average net assets after waiver. See
"Manager" in the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
10
<PAGE>
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
Effective November 1, 1993, PMF waived 75% of its management fee. During the
fiscal year ended August 31, 1994, PMF voluntarily waived $243,395 of its
management fee (.40 of 1% of average net assets). The Series is not required to
reimburse PMF for such management fee waiver. Thereafter, PMF may from time to
time agree to waive all or a portion of its management fee and subsidize certain
operating expenses of the Series. Fee waivers and expense subsidies will
increase the Series' yield. See "Fund Expenses" and "Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD OR THE DISTRIBUTOR), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SERIES'
SHARES. IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities Incorporated
(Prudential Securities or PSI) and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses. The State of Texas requires that
shares of the Series may be sold in that state only by dealers or other
financial institutions which are registered there as broker-dealers.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1994, the Series paid PMFD a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers and other persons which distribute shares of the Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
11
<PAGE>
For the fiscal year ended August 31, 1994, PMFD incurred distribution expenses
in the aggregate of $75,743 with respect to the Series, all of which was
recovered through the distribution fee paid by the Series to PMFD. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Purchases of portfolio securities are made from dealers, underwriters and
issuers; sales prior to maturity are made, for the most part, to dealers and
issuers. The Series does not normally incur any brokerage commission expense on
such transactions. The instruments purchased by the Series generally are 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. Securities purchased in underwritten offerings include a
fixed amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. When securities are purchased or sold
directly from or to an issuer, no commissions or discounts are paid. The policy
of the Series regarding purchases and sales of securities is that primary
consideration will be given to obtaining the most favorable price and efficient
execution of transactions.
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
12
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days the New York Stock Exchange
is open for trading, except on days on which no orders to purchase, sell or
redeem shares have been received by the Series or days on which changes in the
value of the Series' portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
13
<PAGE>
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income. The Series does not expect to have
long-term capital gains.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Connecticut law, distributions from the Series to individual
shareholders of the 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 are excluded from
gross income for federal income tax purposes as exempt-interest dividends and
are derived from interest payments on Connecticut Obligations. It is likely that
capital gain dividends derived from the sale of Connecticut Obligations also are
not subject to taxation pursuant to the Connecticut Personal Income Tax. Other
types of distributions received from the Series, including distributions of
interest on, and capital gain dividends derived from sales of, obligations
issued by other issuers, are subject to the Connecticut Personal Income Tax.
Individual shareholders and estates and trusts also may be subject to
alternative minimum tax for Connecticut tax purposes with respect to certain
distributions from the Series.
Distributions from the Series to corporate shareholders (other than Subchapter
S corporations) that are exempt-interest dividends, whether or not derived from
interest payments on Connecticut Obligations, are subject to the Connecticut
Corporation Business Tax. Thirty percent of distributions to corporate
shareholders (other than Subchapter S corporations) that are treated as
dividends for federal income tax purposes (not including exempt-interest
dividends) is generally subject to taxation pursuant to the Connecticut
Corporation Business Tax; the remaining 70% is excluded.
14
<PAGE>
Distributions from the Series to shareholders that are Subchapter S
corporations are not subject to the Connecticut Corporation Business Tax to the
extent such distributions are exempt-interest dividends and separately stated
items for federal income tax purposes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE OR SUCH OTHER
DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS
AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential
Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash.The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Money Market Series,
Massachusetts Series, Michigan Series, Minnesota Series, New Jersey Money Market
Series, New Jersey Series, New York Income Series (not presently being offered),
New York Money Market Series, New York Series, North Carolina Series, Ohio
Series and Pennsylvania Series. The Fund has received an order from the SEC
permitting the issuance and sale of multiple classes of shares. Currently, all
series of the Fund, except for the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series, the New
York Income Series and the New York Money Market Series, offer three classes,
designated Class A, Class B and Class C shares. The Connecticut Money Market
Series, the Massachusetts Money Market Series, the New Jersey Money Market
Series and the New York Money Market Series offer only one class of shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How
15
<PAGE>
to Sell Your Shares." Each share of the Series is equal as to earnings, assets
and voting privileges, and each class bears the expenses related to the
distribution of its shares. There are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of beneficial
interest of each series is entitled to its portion of all of the Fund's assets
after all debt and expenses of the Fund have been paid. The Fund's shares do not
have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWISK, NEW JERSEY 08906-5020. The minimum initial
investment is $1,000. The minimum subsequent investment is $100. All minimum
investment requirements are waived for the Command Account program (if the
Series is designated as your primary fund) and certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD, WITHOUT A SALES CHARGE, AT THE NAV PER SHARE
NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E., CHECK OR FEDERAL FUNDS
WIRED TO PMFS.) See "How the Fund Values its Shares." When payment is received
by PMFS prior to 4:30 P.M., New York time, in proper form, a share purchase
order will be entered at the price determined as of 4:30 P.M., New York time, on
that day, and dividends on the shares purchased will begin on the business day
following such investment. See "Taxes, Dividends and Distributions."
16
<PAGE>
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT. Prudential Securities has advised the Fund that it has
instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of free
credit balances of $1,000 or more ($1.00 for IRAs) (Eligible Credit Balances)
held in such client's account in shares of the Series (Autosweep). To effect the
automatic investment of Eligible Credit Balances representing the proceeds from
the sale of securities, Prudential Securities will enter orders for the purchase
of shares of the Series at the opening of business on the day following the
settlement of such securities transaction; to effect the automatic investment of
Eligible Credit Balances representing non-trade related credits, Prudential
Securities will enter orders for the purchase of shares of the Series at the
opening of business semi-monthly. All shares purchased pursuant to such
procedures will be issued at the NAV of such shares determined on the date the
order is entered and will receive the next dividend declared after such shares
are issued.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential
17
<PAGE>
Securities and will not begin earning dividends on shares of the Series until
the second business day after receipt of the order by Prudential Securities from
the client. Accordingly, Prudential Securities will have the use of such free
credit balances during this period.
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed application form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, Connecticut Money Market Series, specifying on the wire the account
number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day and receive dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (Connecticut Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment for the purchase price of such shares and, in
the case of a new account, a completed application form. You should also submit
an IRS Form W-9. If PMFS receives an order to purchase shares of the Series and
payment in proper form prior to 4:30 P.M., New York time, the purchase order
will be effective that day and the investor will be entitled to dividends the
following business day. See "Taxes, Dividends and Distributions." Checks should
be made payable to Prudential Municipal Series Fund, Connecticut Money Market
Series. Certified checks are not necessary, but checks must be drawn on a bank
located in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares" below. The minimum initial investment by check is $1,000 and the minimum
subsequent investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the
18
<PAGE>
securities sale, and (ii) in the case of Available Cash resulting from non-trade
related credits (I.E., receipt of dividends and interest payments, or a cash
payment by the participant into his or her Securities Account), on the business
day after receipt by Prudential Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or existing
under the Advantage Account Program, such as those incurred by use of the
Visa-R- Account, including Visa purchases, cash advances and Visa Account
checks. Each Advantage Account Program Securities Account will be automatically
scanned for debits each business day as of the close of business on that day and
after application of any free credit cash balances in the account to such
debits, a sufficient number of shares of the Series (if selected as the primary
fund) and, if necessary, shares of other Advantage Account funds owned by the
Advantage Account Program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PMF
which are not primary Advantage Account funds will be redeemed as of that
business day to satisfy any remaining debits in the Securities Account. Shares
may not be purchased until all debits, overdrafts and other requirements in the
Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command-SM- Account program, an integrated financial services program of
Prudential Securities. Investors having a Command Account may select the Series
as their primary fund. Such investors will have free credit cash balances of
$1.00 or more in their Securities Account (Available Cash) (a component of the
Command Account program) automatically invested in shares of the Series as
described below. Specifically, an order to purchase shares of the Series is
placed (i) in the case of Available Cash resulting from the proceeds of
securities sales, on the settlement date of the securities sale, and (ii) in the
case of Available Cash resulting from non-trade related credits (I.E., receipt
of dividends and interest payments, or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate Command Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund. There are no minimum investment requirements for participants in the
Command Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or existing
under the Command program, such as those incurred by use of the Visa Gold
Account, including Visa purchases, cash advances and Visa Account checks. Each
Command program Securities Account will be automatically scanned for debits
monthly for all Visa purchases incurred during that month and each business day
as of the close of business on that day for all cash advances and check charges
as incurred and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series and, if
necessary, shares of other Command funds owned by the Command program
participant which have not been selected as his or her primary fund or shares of
a participant's money market funds managed by PMF which are not primary Command
funds will be redeemed as of that business day to satisfy any remaining debits
in the Securities Account. The single monthly debit for Visa purchases will be
made on the twenty-fifth day of each month,
19
<PAGE>
or the prior business day if the twenty-fifth falls on a weekend or holiday.
Margin loans will be utilized to satisfy debits remaining after the liquidation
of all shares of the Series in a Securities Account, and shares may not be
purchased until all debits, margin loans and other requirements in the
Securities Account are satisfied. Command Account participants will not be
entitled to dividends declared on the date of redemption.
For information on participation in the Command Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the
20
<PAGE>
extent of that deficiency to the nearest higher dollar unless the client
notifies Prudential Securities to the contrary. The amount of the redemption
will be the lesser of (a) the total net asset value of the Series' shares held
in the client's Prudential Securities account or (b) the deficiency in the
client's Prudential Securities account at the close of business on the date such
deficiency is due. Accordingly, a Prudential Securities client utilizing
automatic redemption procedure and who wishes to pay for a securities
transaction or satisfy any other debit balance in his or her account other than
through this automatic redemption procedure must do so not later than the day of
settlement for such securities transaction or the date the debit balance is
incurred. Prudential Securities clients who have elected to utilize Autosweep
will not be entitled to dividends declared on the date of redemption.
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth above and the form returned to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time,
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services, Inc., at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
AS ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
21
<PAGE>
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C
shares of other series of the Fund or Class C shares of the Prudential Mutual
Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal indentification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
22
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should
contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic charge to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
for shareholders which provides for monthly or quarterly checks. See "How to
Sell Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks
and other institutions that wish to open multiple accounts. An institution
may open a single master account by filing an application form with the
Transfer Agent, Attention: Customer Service, P.O. Box 15005, New Brunswick,
New Jersey 08906, signed by personnel authorized to act for the institution.
Individual sub-accounts may be opened at the time the master account is
opened by listing them, or they may be added at a later date by written
advice or by filing forms supplied by the Fund. Procedures are available to
identify sub-accounts by name and number within the master account name. The
investment minimums set forth above are applicable to the aggregate amounts
invested by a group and not to the amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and
semi-annual reports. The financial statements appearing in annual reports
are audited by independent accountants. In order to reduce duplicate mailing
and printing expenses, the Fund will provide one annual and semi-annual
shareholder report and annual prospectus per household. You may request
additional copies of such reports by calling (800) 225-1852 or by writing to
the Fund at One Seaport Plaza, New York, New York 10292. In addition,
monthly unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
One Seaport Plaza, New York, New York 10292, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555
(collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
23
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund
Prudential Global Natural Resources Fund
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund. Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
CALCULATION OF YIELD............................ 6
HOW THE FUND INVESTS............................ 6
Investment Objective and Policies............. 6
Other Investments and Policies................ 9
Investment Restrictions....................... 10
HOW THE FUND IS MANAGED......................... 10
Manager....................................... 10
Distributor................................... 11
Portfolio Transactions........................ 12
Custodian and Transfer and
Dividend Disbursing Agent.................... 13
HOW THE FUND VALUES ITS SHARES.................. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 13
GENERAL INFORMATION............................. 15
Description of Shares......................... 15
Additional Information........................ 16
SHAREHOLDER GUIDE............................... 16
How to Buy Shares of the Fund................. 16
How to Sell Your Shares....................... 20
How to Exchange Your Shares................... 22
Shareholder Services.......................... 23
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF139A
CUSIP No: 74435M-64-8
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(CONNECTICUT MONEY MARKET SERIES)
- --------------------------------------
[Logo]
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(FLORIDA SERIES)
- ------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Florida Series) (the "Series") is
one of seventeen series of an open-end, management investment company, or mutual
fund. This Series is non-diversified and seeks to provide the maximum amount of
income that is exempt from federal income taxes consistent with the preservation
of capital and to invest in securities which will enable its shares to be exempt
from the Florida intangibles tax and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series will be invested in obligations within the four highest ratings of
either Moody's Investors Service or Standard & Poor's Ratings Group or in
unrated securities which, in the opinion of the Fund's investment adviser, are
of comparable quality. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Florida Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the Florida Series is offered
through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from federal income taxes consistent with the preservation of capital
and to invest in securities which will enable its shares to be exempt from
the Florida intangibles tax. It seeks to achieve this objective by investing
primarily in Florida State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which, in the opinion of counsel, are
exempt from the Florida intangibles tax and which pay income exempt from
federal income tax (Florida Obligations). There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Florida Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Florida Obligations. To hedge
against changes in interest rates, the Series may also purchase put options
and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 11.
The Series is non-diversified so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves more risk than investment in a
diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 12.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1994,
PMF served as manager or administrator to 68 investment companies, including
38 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and is paid an annual distribution and service
fee which is being waived until December 31, 1994 and thereafter will be
charged at the rate of .10 of 1% of the average daily net assets of the
Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily
net assets of the Class B shares and is paid an annual distribution and
service fee at the rate of .75 of 1% of the average daily net assets of the
Class C shares. Prior to August 1, 1994, Class C shares were called Class D
shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 21 and
"Shareholder Guide--Shareholder Services" at page 30.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 17 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
-Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
-Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
-Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
25.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 18.
3
<PAGE>
FUND EXPENSES
(FLORIDA SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------- ---------------------- ----------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).......... 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the first 1% on redemptions made
year, decreasing by 1% within one year of
annually to 1% in the purchase
fifth and sixth years
and 0% the seventh
year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES** CLASS B SHARES** CLASS C SHARES**
----------------- ----------------------- -----------------
<S> <C> <C> <C>
Management Fees (Before Waiver)............... .50% .50% .50%
12b-1 Fees (Before Waiver).................... .10++ .50 .75
Other Expenses (Before Subsidy)............... .17 .19 .17
--
--- ---
Total Fund Operating Expenses (Before Waiver
and Subsidy)................................. .77% 1.19% 1.42%
--
--
--- ---
--- ---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and (2) redemption at the end of each time period:
Class A............................................................. $ 38 $ 54 $ 72 $ 123
Class B............................................................. $ 62 $ 68 $ 75 $ 127
Class C............................................................. $ 24 $ 45 $ 76 $ 170
You would pay the following expenses on the same investment, assuming
no redemption:
Class A............................................................. $ 38 $ 54 $ 72 $ 123
Class B............................................................. $ 12 $ 38 $ 65 $ 127
Class C............................................................. $ 14 $ 45 $ 78 $ 170
The above example with respect to Class A and Class C shares is based on restated data for the Series' fiscal
year ended August 31, 1994. Prior to August 1, 1994, Class C shares were called Class D shares. The above
example with respect to Class B shares is based on expenses expected to have been incurred if Class B shares had
been in existence during the entire fiscal year ended August 31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an
investor in the Series will bear, whether directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses" includes operating expenses of the Series,
such as Trustees' and professional fees, registration fees, reports to shareholders and transfer agency and
custodian fees.
<FN>
------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** Based on expenses incurred during the fiscal year ended August 31, 1994,
without taking into account the management and 12b-1 fee (Class A shares
only) waivers and the subsidy of expenses. At the current level of
management fee waiver (60%), 12b-1 fee waiver (100%) for Class A shares
and other expense subsidy (100%), Management Fees, 12b-1 Fees, Other
Expenses and Total Fund Operating Expenses would be .20%, .0%, 0% and
.20%, respectively, of the average net assets of the Series' Class A
shares and .20%, .50%, .02% and .72%, respectively, of the average net
assets of the Series' Class B shares and .20%, .75%, 0% and .95%,
respectively, of the average net assets of the Series' Class C shares.
See "How the Fund is Managed--Manager--Fee Waivers and Subsidy."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of the Series, the Distributor has
agreed to limit its distribution fees with respect to the Class A shares
of the Series to no more than .10 of 1% of the average daily net asset
value of the Class A shares of the Series for the fiscal year ending
August 31, 1995. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
DECEMBER 28,
1990*
YEAR ENDED AUGUST 31, THROUGH
-------------------------------- AUGUST 31,
1994 1993 1992 1991
---------- -------- -------- ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $ 10.87 $ 10.27 $ 9.76 $ 9.55
---------- -------- -------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+....................... .59 .57 .65 .44
Net realized and unrealized gain on
investment transactions..................... (.76) .73 .51 .21
---------- -------- -------- ------------
Total from investment operations......... (.17) 1.30 1.16 .65
---------- -------- -------- ------------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.59) (.57) (.65) (.44)
Distributions from net realized gains........ (.20) (.13) -- --
---------- -------- -------- ------------
Total distributions...................... (.79) (.70) (.65) (.44)
---------- -------- -------- ------------
Net asset value, end of period............... $ 9.91 $ 10.87 $ 10.27 $ 9.76
---------- -------- -------- ------------
---------- -------- -------- ------------
TOTAL RETURN++:.............................. (1.69)% 13.78% 12.26% 6.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $134,849 $148,900 $104,335 $63,929
Average net assets (000)..................... $146,489 $123,820 $ 82,893 $41,528
Ratios to average net assets+:
Expenses, including distribution fees...... .20% .20% .09% 0
Expenses, excluding distribution fees...... .20% .20% .09% 0
Net investment income...................... 5.67% 5.94% 6.41% 6.68%**
Portfolio turnover........................... 75% 68% 56% 39%
<FN>
------------------
* Commencement of offering of Class A shares.
** Annualized.
+ Net of expense subsidy and fee waiver.
++ Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated
period)
(Class B Shares)
The following financial highlights have been audited by Deloitte &
Touche LLP, independent accountants, whose report thereon was unqualified.
This information should be read in conjunction with the financial statements
and the notes thereto, which appear in the Statement of Additional
Information. The following financial highlights contain selected data for a
Class B share of beneficial interest outstanding, total return, ratios to
average net assets and other supplemental data for the period indicated.
This information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS B
------------
AUGUST 1,
1994*
THROUGH
AUGUST 31,
1994
------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 9.95
------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income+... .04
(.04)
Net realized and
unrealized gain (loss)
on
investment
transactions............
------
Total from investment
operations.......... --
------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.04)
Distributions from net
realized gains.......... --
------
Total
distributions....... (.04)
------
Net asset value, end of $ 9.91
period..................
------
------
TOTAL RETURN++:.......... (0.05)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 582
Average net assets
(000)................... $ 118
Ratios to average net
assets:#
Expenses, including
distribution fee...... .70%+**
Expenses, excluding
distribution fee...... .20%+**
Net investment
income................ 6.21%+**
Portfolio turnover....... 75%
<FN>
--------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ 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.
# Because of the event referred to in * and the timing of such, the ratios
for the Class B shares are not necessarily comparable to those of Class A
or Class C shares and are not necessarily indicative of future ratios.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class C Shares)
The following financial highlights have been audited by Deloitte &
Touche LLP, independent accountants, whose report thereon was unqualified.
This information should be read in conjunction with the financial statements
and the notes thereto, which appear in the Statement of Additional
Information. The following financial highlights contain selected data for a
Class C share of beneficial interest outstanding, total return, ratios to
average net assets and other supplemental data for the periods indicated.
This information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
----------------------------
JULY 26,
YEAR ENDED 1993* THROUGH
AUGUST 31, AUGUST 31,
1994 1993
------------ -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, $ 10.87 $ 10.58
beginning of period.....
------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income+... .48 .03
(.76) .29
Net realized and
unrealized gain (loss)
on
investment
transactions............
------------ ------
Total from investment
operations.......... (.28) .32
------------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.48) (.03)
Distributions from net
realized gains.......... (.20) --
------------ ------
Total
distributions....... (.68) (.03)
------------ ------
Net asset value, end of $ 9.91 $ 10.87
period..................
------------ ------
------------ ------
TOTAL RETURN++:.......... (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $11,185 $ 3,132
Average net assets
(000)................... $ 9,280 $ 1,038
Ratios to average net
assets+:
Expenses, including
distribution fee...... .95% .95%**
Expenses, excluding
distribution fee...... .20% .20%**
Net investment
income................ 4.99% 5.19%**
Portfolio turnover....... 75% 68%
<FN>
--------------------
* Commencement of offering of Class C shares. Prior to August 1, 1994, Class
C shares were called Class D shares.
** Annualized.
+ Net of expense subsidy and fee waiver.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH SERIES OF THE FUND IS MANAGED INDEPENDENTLY. THE FLORIDA SERIES (THE
SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION
OF CAPITAL AND TO INVEST IN SECURITIES WHICH WILL ENABLE ITS SHARES TO BE EXEMPT
FROM THE FLORIDA INTANGIBLES TAX AND, IN CONJUNCTION THEREWITH, THE SERIES MAY
ALSO INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See
"Investment Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN FLORIDA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH, IN THE
OPINION OF COUNSEL, ARE EXEMPT FROM THE FLORIDA INTANGIBLES TAX AND WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAX (FLORIDA OBLIGATIONS). THERE CAN BE NO
ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Florida Obligations and certain types of U.S. Government securities and other
assets are exempt from the Florida intangibles tax. The Fund has obtained a
ruling from Florida authorities that, if on January 1 of any year the Series'
portfolio of assets consists solely of such exempt investments, then the Series'
shares will be exempt from the Florida intangibles tax payable in that year.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Florida Obligations could include general obligation bonds of
the State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term Florida Obligations, and the dollar-weighted average maturity of the
Series' portfolio will generally range between 10-20 years. The Series may also
invest in certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic
8
<PAGE>
adjustment in the interest rate based on prevailing market rates and generally
would allow the Series to demand payment of the obligation on short notice at
par plus accrued interest, which amount may be more or less than the amount the
Series paid for them. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another security or the value of an index. Changes in the interest rate on
the other security or index inversely affect the residual interest rate paid on
the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL FLORIDA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Florida Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Florida Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Florida Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN FLORIDA OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that the Series will have at least 80% of its total assets
invested in Florida Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation. The Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Florida Obligations or may invest its assets so that more
than 20% of the income is subject to federal income taxes.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees. The Fund has obtained a ruling from
Florida authorities that such municipal forward contracts qualify as assets
exempt from the Florida intangibles tax.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON FLORIDA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Florida Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
10
<PAGE>
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and
11
<PAGE>
movements in interest rates and, in turn, the prices of the securities that are
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN FLORIDA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Under the State
Constitution and applicable statutes, the State budget as a whole, and each
separate fund within the State budget, must be kept in balance from currently
available revenues during each State fiscal year. Estimated General Revenue and
Working Capital fund revenues of $13,582.7 million for 1993-94 (excluding
Hurricane Andrew related revenues and expenses) represent an increase of 8.4%
over revenues for 1992-93. This amount reflects a transfer of $190 million, out
of an estimated $220 million in non-recurring revenue due to Hurricane Andrew,
to a hurricane relief trust fund. Estimated Revenue for 1994-95 of $14,573.8
million represent an increase of 7.3% over 1993-94. This amount reflects a
transfer of $159 million in non-recurring revenue due to Hurricane Andrew, to a
hurricane relief trust fund. If the issuers of any of the Florida Obligations
are unable to meet their financial obligations because of natural disasters or
for other reasons, the income derived by the Series, the ability to preserve or
realize appreciation of the Series' capital and the Series' liquidity could be
adversely affected.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
12
<PAGE>
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets, net of expense subsidy and fee waivers, were
.20%, .70% (annualized) and .95% for the Series' Class A, Class B and Class C
shares, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .20 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee, net of waiver, of .20 of 1% of the Series' average net assets.
See "Fee Waivers and Subsidy" below and "Manager" in the Statement of Additional
Information.
13
<PAGE>
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
During the fiscal year ended August 31, 1994, PMF voluntarily waived $467,337
(.30 of 1% of average net assets) of its management fee and subsidized all
operating expenses of the Class A shares, Class B shares and Class C shares of
the Series. Effective September 1, 1993, PMF agreed to waive 60% of its
management fee and to subsidize all operating expenses of the Class A, Class B
and Class C shares of the Series, and Prudential Mutual Fund Distributors, Inc.
agreed to waive its distribution fee with respect to the Class A shares of the
Series. Effective January 1, 1995, Prudential Mutual Fund Distributors, Inc.
will eliminate the distribution fee waiver with respect to the Class A shares of
the Series. The Series is not required to reimburse PMF or Prudential Mutual
Fund Distributors, Inc. for such fee waivers or expense subsidies. Thereafter,
PMF may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Series. Fee waivers and expense
subsidies will increase the Series' yield and total return. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF CLASS A SHARES OF THE SERIES. IT IS A
WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), affiliated
broker-dealers, commissions and account servicing fees paid to, or on account
of, other broker-dealers or financial institutions (other than national banks)
which have entered into agreements with the
14
<PAGE>
Distributor, advertising expenses, the cost of printing and mailing prospectuses
to potential investors and indirect and overhead costs of Prudential Securities
and Prusec associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses. The State of Texas requires that
shares of the Series may be sold in that state only by dealers or other
financial institutions which are registered there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PMFD has agreed to limit its distribution-related fees
payable under the Class A Plan to .10 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD waived its distribution fee
under the Class A Plan. For the fiscal year ended August 31, 1994, PMFD received
approximately $880,300 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND .75 OF 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee at a rate of up to .25 of 1% of the average daily net
assets of the Class B shares; provided that the total distribution-related fee
does not exceed .50 of 1%. The Class C Plan provides for the payment to
Prudential Securities of (i) an asset-based sales charge of .50 of 1% of the
average daily net assets of the Class C shares, and (ii) a service fee of .25 of
1% of the average daily net assets of the Class C shares; provided that the
total distribution-related fee does not exceed .75 of 1%. The service fee is
used to pay for personal service and/or the maintenance of shareholder accounts.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $116,639 under the Class C Plan and
received $69,602 from the Series under the Class C Plan. Prudential Securities
received no contingent deferred sales charges from redemptions of Class C shares
during this period.
For the period August 1, 1994 through August 31, 1994, the Series paid
distribution expenses of .50 of 1% (annualized) of the average daily net assets
of the Class B shares. For the fiscal year ended August 31, 1994, the Series
paid distribution expenses of .75 of 1% of the average daily net assets of the
Class C shares. The Series records all payments made under the Plans as expenses
in the calculation of net investment income.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
15
<PAGE>
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
16
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends
17
<PAGE>
by the Series were reinvested on the reinvestment dates during the period and
less all recurring fees. The "aggregate" total return reflects actual
performance over a stated period of time. "Average annual" total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. "Average annual" total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither "average annual" total return nor "aggregate" total return takes into
account any federal or state income taxes which may be payable upon redemption.
The Fund also may include comparative performance information in advertising or
marketing the shares of the Series. Such performance information may include
data from Lipper Analytical Services, Inc., Morningstar Publications, Inc.,
other industry publications, business periodicals and market indices. See
"Performance Information" in the Statement of Additional Information. The Fund
will include performance data for each class of shares of the Series in any
advertisement or information including performance data of the Series. Further
performance information is contained in the Series' annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes, that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
18
<PAGE>
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Series will not be subject to any Florida state
income tax on distributions received from the Series. However, distributions are
likely to be taxable in whole or in part to corporate shareholders which are
subject to Florida corporate income tax.
Florida currently imposes an "intangibles tax" on certain securities and other
intangible assets owned by Florida residents. Florida Obligations and certain
types of U.S. Government securities and other assets are exempt from this
intangibles tax. The Fund has obtained a ruling from Florida authorities that,
if on January 1 of any year the Series' portfolio of assets consists solely of
such exempt investments, then the Series' shares will be exempt from the Florida
intangibles tax payable in that year. If the Series holds any other type of
assets on that date, then the entire value of the Series shares (except for that
portion of the value of the shares attributable to U.S. government obligations)
will be subject to the Florida intangibles tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or Florida purposes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in
19
<PAGE>
the case of certain foreign shareholders) with the required certifications
regarding the shareholder's status under the federal income tax law. Such
withholding also is required on taxable dividends and capital gain distributions
made by the Series unless it is reasonably expected that at least 95% of the
distributions of the Series are comprised of tax-exempt dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series will elect to treat net
capital losses of approximately $573,400 incurred in the ten month period ended
August 31, 1994 as having been incurred in the following fiscal year. Dividends
paid by the Series with respect to each class of shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount except that each such class will
bear its own distribution charges, generally resulting in lower dividends for
Class B and Class C shares. Distributions of net capital gains, if any, will be
paid in the same amount for each class of shares. See "How the Fund Values its
Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attn: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
20
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Prior to August 1, 1994, Class C shares were designated Class D shares. Each
class of shares represents an interest in the same assets of the Series and is
identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
21
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
22
<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------ --------------------- ------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (charged at Initial sales charge waived or
of the public offering price a rate of .10 of 1% reduced for certain purchases
effective January 1,
1995)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of .75 of 1% Shares do not convert to another
the amount invested or the class
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
23
<PAGE>
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ----------------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their
24
<PAGE>
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 90 days of the commencement of the financial adviser's employment at
Prudential Securities, (ii) the purchase is made with proceeds of a redemption
of shares of any open-end, non-money market fund sponsored by the financial
adviser's previous employer (other than a fund which imposes a distribution or
service fee of .25 of 1% or less) on which no deferred sales load, fee or other
charge was imposed on redemption and (iii) the financial adviser served as the
client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
25
<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. A
CDSC will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
26
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ -------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of shares made during the preceding six years; then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
Class C shares purchased prior to December 30, 1994, shall not be subject to
the remaining CDSC, if any.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
27
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
28
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
29
<PAGE>
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A
SALES CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
to shareholders which provides for monthly or quarterly checks. Withdrawals
of Class B and Class C shares may be subject to a CDSC. See "How to Sell
Your Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
One Seaport Plaza, New York, New York 10292, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555
(collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
30
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
-COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
-INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 17
HOW THE FUND VALUES ITS SHARES.................. 17
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 18
GENERAL INFORMATION............................. 20
Description of Shares......................... 20
Additional Information........................ 21
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 25
Conversion Feature--Class B Shares............ 28
How to Exchange Your Shares................... 29
Shareholder Services.......................... 30
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF148A 444-3351
Class A: 74435M-50-7
CUSIP Nos.: Class B: 74435M-60-6
Class C: 74435M-61-4
PROSPECTUS
December 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(FLORIDA SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(GEORGIA SERIES)
- ------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Georgia Series) (the "Series") is
one of seventeen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from Georgia State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations which, in the opinion of the Fund's investment adviser, are of
comparable quality. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests-- Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Georgia Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Georgia Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Georgia State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Georgia
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay income exempt, in the opinion of counsel, from Georgia State
and federal income taxes (Georgia Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund Invests--
Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Georgia Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Georgia Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3%
of the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge
or CDSC (declining from 5% to zero of the
lower of the amount invested or the
redemption proceeds) which will be imposed on
certain redemptions made within six years of
purchase. Although Class B shares are subject
to higher ongoing distribution-related
expenses than Class A shares, Class B shares
will automatically convert to Class A shares
(which are subject to lower ongoing
distribution-related expenses) approximately
seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for
one year after purchase, are subject to a 1%
CDSC on redemptions. Like Class B shares,
Class C shares are subject to higher ongoing
distribution-related expenses than Class A
shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(GEORGIA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a 3% None None
percentage of offering price)................
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES** CLASS B SHARES** CLASS C SHARES**
--------------------- ------------------------- -------------------------
<S> <C> <C> <C>
.50% .50% .50%
Management Fees...............................
.10++ .50 .75++
12b-1 Fees....................................
.70 .70 .70
Other Expenses................................
--- --- ---
Total Fund Operating Expenses................. 1.30% 1.70% 1.95%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A............................................................................... $ 43 $ 70 $ 99 $ 182
Class B............................................................................... $ 67 $ 84 $ 102 $ 185
Class C............................................................................... $ 30 $ 61 $ 105 $ 227
You would pay the following expenses on the same investment, assuming no redemption:
Class A............................................................................... $ 43 $ 70 $ 99 $ 182
Class B............................................................................... $ 17 $ 54 $ 92 $ 185
Class C............................................................................... $ 20 $ 61 $ 105 $ 227
The above example with respect to Class A and Class B shares is based on data
for the Series' fiscal year ended August 31, 1994. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the entire fiscal year ended August
31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** The Manager has agreed to subsidize expenses so that Total Fund Operating
Expenses do not exceed 1.40%, 1.80% and 2.05% of the average net assets of
the Class A, Class B and Class C shares, respectively. No subsidy was
required for the fiscal year ended August 31, 1994.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1995. Total Fund Operating Expenses of the Class A and Class C
shares without such limitations would be 1.50% and 2.20%, respectively. See
"How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
----------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
------- ------- ----- ------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.12 $11.69 $11.39 $11.05 $11.26
------- ------- ----- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .57 .62 .65 + .64 .41
Net realized and unrealized gain
(loss) on investment
transactions...................... (.76) .85 .54 .43 (.21)
------- ------- ----- ------- -----------
Total from investment
operations...................... (.19) 1.47 1.19 1.07 .20
------- ------- ----- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.57) (.62) (.65 ) (.64) (.41)
Distributions from net realized
gains............................. (.17) (.42) (.24 ) (.09) --
------- ------- ----- ------- -----------
Total distributions.............. (.74) (1.04) (.89 ) (.73) (.41)
------- ------- ----- ------- -----------
Net asset value, end of period..... $11.19 $12.12 $11.69 $11.39 $11.05
------- ------- ----- ------- -----------
------- ------- ----- ------- -----------
TOTAL RETURN++:.................... (1.58)% 13.28% 10.84% 10.03% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $1,182 $1,107 $177 $ 102 $ 83
Average net assets (000)........... $1,134 $ 475 $155 $ 98 $ 21
Ratios to average net assets:
Expenses, including distribution
fee............................. 1.30% 1.27% 1.24 %+ 1.70% 1.46%**
Expenses, excluding distribution
fee............................. 1.20% 1.17% 1.14 %+ 1.60% 1.36%**
Net investment income............ 4.92% 5.29% 5.68 %+ 5.67% 5.92%**
Portfolio turnover................. 27% 41% 58 % 33% 49%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
+ Net of expense subsidy.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase on the first day and a sale on the last day
of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------------------
SEPTEMBER 25,
1984*
YEAR ENDED AUGUST 31, THROUGH
----------------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 12.12 $11.69 $11.39 $11.05 $11.23 $10.97 $10.97 $11.82 $10.51 $10.00
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .52 .57 .61+ .60 .65 .68 .73+ .76+ .84+ .79+
Net realized and
unrealized gain
(loss) on
investment
transactions...... (.76) .85 .54 .43 (.18) .26 -- (.53) 1.31 .51
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
Total from
investment
operations...... (.24) 1.42 1.15 1.03 .47 .94 .73 .23 2.15 1.30
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.52) (.57) (.61) (.60) (.65) (.68) (.73) (.76) (.84) (.79)
Distributions from
net realized
gains............. (.17) (.42) (.24) (.09) -- -- -- (.32) -- --
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
Total
distributions... (.69) (.99) (.85) (.69) (.65) (.68) (.73) (1.08) (.84) (.79)
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
Net asset value,
end of period..... $11.19 $12.12 $11.69 $11.39 $11.05 $11.23 $10.97 $10.97 $11.82 $10.51
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
--------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
TOTAL RETURN+++:... (1.98)% 12.83% 10.40% 9.57% 4.18% 8.74% 6.98% 1.97% 21.22% 13.26%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $19,522 $20,811 $17,702 $17,722 $20,310 $24,124 $25,088 $24,714 $24,719 $14,451
Average net assets
(000)............. $20,492 $18,437 $17,436 $19,008 $22,614 $25,292 $23,426 $26,996 $20,022 $7,405
Ratios to average
net assets:
Expenses,
including
distribution
fee............. 1.70% 1.67% 1.64%+ 2.08% 1.67% 1.58% 1.29%+ 1.18%+ 1.12%+ .93%+**
Expenses,
excluding
distribution
fee............. 1.20% 1.17% 1.14%+ 1.58% 1.22% 1.20% .82%+ .74%+ .64%+ .45%+**
Net investment
income.......... 4.52% 4.89% 5.28%+ 5.36% 5.85% 6.02% 6.73%+ 6.89%+ 7.23%+ 7.64%+**
Portfolio
turnover.......... 27% 41% 58% 33% 49% 83% 67% 77% 57% 64%
<FN>
- -----------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated
period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class C share
of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the period indicated. This
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
------------
AUGUST 1,
1994*
THROUGH
AUGUST 31,
1994
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.23
------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income....................................... .04
Net realized and unrealized gain (loss) on
investment transactions.................................... (.04)
------
Total from investment operations........................ --
------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Dividends from net investment income........................ (.04)
------
Net asset value, end of period.............................. $ 11.19
------
------
TOTAL RETURN++:............................................. (0.06)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period................................... $ 200
Average net assets.......................................... $ 199
Ratios to average net assets**/#:
Expenses, including distribution fee...................... 2.05%
Expenses, excluding distribution fee...................... 1.30%
Net investment income..................................... 4.68%
Portfolio turnover.......................................... 27%
<FN>
- -----------------
* Commencement of offering of Class C shares.
** Annualized.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends.
Total return is not annualized.
# Because of the event referred to in * and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A
and Class B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE GEORGIA SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM GEORGIA STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN GEORGIA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM GEORGIA STATE AND FEDERAL INCOME TAXES
(GEORGIA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Georgia law, dividends paid by the Series are exempt from
Georgia income tax for resident individuals and corporations to the extent they
are derived from interest payments on Georgia Obligations. Georgia Obligations
could include general obligation bonds of the State, counties, cities, towns,
etc., revenue bonds of utility systems, highways, bridges, port and airport
facilities, colleges, hospitals, etc., and industrial development and pollution
control bonds. The Series will invest in long-term obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL GEORGIA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Georgia Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Georgia Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Georgia Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN GEORGIA OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that at least 80% of the income will be exempt from Georgia and
federal income taxes or the Series will have at least 80% of its total assets
invested in Georgia Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation and the Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes, or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Georgia Obligations or may invest its assets so that more
than 20% of the income is subject to Georgia State or federal income taxes. The
Series will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies -- In General" in
the Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a
9
<PAGE>
possible decline in the market value of the security to which the put applies in
the event of interest rate fluctuations or, in the case of liquidity puts, for
the purpose of shortening the effective maturity of the underlying security. The
aggregate value of premiums paid to acquire puts held in the Series' portfolio
(other than liquidity puts) may not exceed 10% of the net asset value of the
Series. The acquisition of a put may involve an additional cost to the Series by
payment of a premium for the put, by payment of a higher purchase price for
securities to which the put is attached or through a lower effective interest
rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON GEORGIA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Georgia Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES
10
<PAGE>
INTENDS TO PURCHASE. THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON
BY THE SERIES INVOLVES ADDITIONAL TRANSACTION COSTS AND IS SUBJECT TO VARIOUS
RISKS AND DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION
OF THE MARKET (INCLUDING INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may
11
<PAGE>
be affected by additions to or deletions from the index which serves as the
basis for a futures contract. Finally, if the price of the security that is
subject to the hedge were to move in a favorable direction, the advantage to the
Series would be partially offset by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN GEORGIA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
GEORGIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF GEORGIA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Georgia's financial
operations in recent years have been favorable with strong revenue gains and
increases in reserve levels recorded through most of the 1980's. However, a
revenue slowdown occurred in fiscal year 1990 and continued into fiscal year
1991. Preliminary results for fiscal year 1994 indicate an excess of revenues
over expenditures of $338,000,000, which is maintained in reserves. The fiscal
1995 budget increases appropriations by 6.2%, inclusive of the new state
lottery, while overall revenues are expected to grow by 7.05% over the previous
fiscal year. If either Georgia or any of its local governmental agencies is
unable to meet its financial obligations, the income derived by the Series, the
ability to preserve or realize appreciation of the Series' capital and the
Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are
12
<PAGE>
not readily marketable. Securities, including municipal lease obligations, that
have a readily available market are not considered illiquid for the purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were 1.30%, 1.70% and 2.05% (annualized) for
the Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
13
<PAGE>
FEE WAIVER AND SUBSIDY
Effective September 1, 1993, PMF agreed to subsidize certain expenses of the
Series to limit total expenses of the Class A and Class B shares to no more than
1.40% and 1.80%, respectively. In addition, PMF has agreed to subsidize certain
expenses of the Series to limit total expenses of the Class C shares to no more
than 2.05%. No subsidy was required for the fiscal year ended August 31, 1994.
The Series is not required to reimburse PMF for any such subsidy. Thereafter,
PMF may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Series. Fee waivers and expense
subsidies will increase the Series' yield and total return. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Fund shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $1,134
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $13,200 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up
14
<PAGE>
to .25 of 1% of the average daily net assets of the Class B shares; provided
that the total distribution-related fee does not exceed .50 of 1%. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $148,400 under the Class B Plan and
received $102,458 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $29,000 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws.
15
<PAGE>
An agreement was simultaneously filed to defer prosecution of these charges for
a period of three years from the signing of the agreement, provided that PSI
complies with the terms of the agreement. If, upon completion of the three year
period, PSI has complied with the terms of the agreement, no prosecution will be
instituted by the United States for the offenses charged in the complaint. If on
the other hand, during the course of the three year period, PSI violates the
terms of the agreement, the U.S. Attorney can then elect to pursue these
charges. Under the terms of the agreement, PSI agreed, among other things, to
pay an additional $330,000,000 into the fund established by the SEC to pay
restitution to investors who purchased certain PSI limited partnership
interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
16
<PAGE>
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
17
<PAGE>
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
18
<PAGE>
Assuming the Series qualifies as a regulated investment company under the
Internal Revenue Code, then, under existing Georgia law, shareholders of the
Series will not be subject to Georgia income taxes on distributions from the
Series to the extent that such distributions represent "exempt-interest
dividends" for federal income tax purposes that are attributable to Georgia
Obligations. Distributions, if any, derived from capital gains or other sources
generally will be taxable to shareholders of the Series for Georgia income tax
purposes. For purposes of the Georgia intangibles tax, shares of the Series
likely are taxable (at the rate of 10 cents per $1,000 in value) to shareholders
who are otherwise subject to such tax.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series will elect to treat net
capital losses of approximately $45,000 incurred in the ten month period ended
August 31, 1994 as having been incurred in the following fiscal year. Dividends
paid by the Series with respect to each class of shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount except that each class will bear its
own distribution charges, generally resulting in lower dividends for Class B and
Class C shares. Distributions of net capital gains, if any, will be paid in the
same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
19
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
20
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
21
<PAGE>
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
22
<PAGE>
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, if may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such
23
<PAGE>
person's employer and (e) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 90 days of the commencement of the
financial adviser's employment at Prudential Securities, (ii) the purchase is
made with proceeds of a redemption of shares of any open-end, non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) on which no
deferred sales load, fee or other charge was imposed on redemption and (iii) the
financial adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
24
<PAGE>
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
25
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------------ -------------------------
<S> <C>
First............................................................. 5.0%
Second............................................................ 4.0%
Third............................................................. 3.0%
Fourth............................................................ 2.0%
Fifth............................................................. 1.0%
Sixth............................................................. 1.0%
Seventh........................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
26
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
27
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
28
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec representative or
the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate
Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund,
Inc.
Prudential Government Securities
Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund,
Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income
Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal
Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series
Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals
Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources
Fund, Inc.
Prudential Intermediate Global Income
Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income
Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed
Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity
Fund, Inc.
Prudential IncomeVertible-R-
Fund, Inc.
Prudential Multi-Sector Fund,
Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth
Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities
Trust
Money Market Series
U.S. Treasury Money Market
Series
Prudential Special Money Market
Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal
Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market
Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity
Portfolio, Inc.
Institutional Money Market
Series
A-1
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES
PERFORMANCE.................................. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 20
Description of Shares......................... 20
Additional Information........................ 21
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 27
How to Exchange Your Shares................... 28
Shareholder Services.......................... 29
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF118A 444049Y
Class A: 74435M-30-9
CUSIP Nos.: Class B: 74435M-40-8
Class C: 74435M-58-0
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(GEORGIA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MARYLAND SERIES)
- ----------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Maryland Series) (the "Series")
is one of seventeen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from Maryland State and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations which, in the opinion of the Fund's investment
adviser, are of comparable quality. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is One Seaport Plaza, New York, New
York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Maryland Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Maryland Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Maryland State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Maryland
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay income exempt, in the opinion of counsel, from Maryland
State and federal income taxes (Maryland Obligations). There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests-- Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Maryland Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Maryland Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of the purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). See "How the
Fund Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of
the Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
-Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
-Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
-Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(MARYLAND SERIES)
<TABLE>
<CAPTION>
CLASS A CLASS C
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES SHARES
------------ ---------------- ------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................ 3% None None
Maximum Sales Load or Deferred
Sales Load Imposed on
Reinvested Dividends........... None None None
Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............ None 5% during the 1% on
first year, redemptions
decreasing by 1% made within
annually to 1% one year of
in the fifth and purchase
sixth years and
0% the seventh
year*
Redemption Fees................. None None None
Exchange Fee.................... None None None
<CAPTION>
CLASS A CLASS C
ANNUAL FUND OPERATING EXPENSES SHARES CLASS B SHARES SHARES
------------ ---------------- ------------
<S> <C> <C> <C>
(as a percentage of average net
assets)
Management Fees................. .50% .50% .50%
12b-1 Fees...................... .10++ .50 .75++
Other Expenses.................. .35 .35 .35
Total Fund Operating Expenses... .95% 1.35% 1.60%
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return
and (2) redemption at the end of each time period:
Class A............................................................................... $ 39 $ 59 $ 81 $ 143
Class B............................................................................... $ 64 $ 73 $ 84 $ 146
Class C............................................................................... $ 26 $ 50 $ 87 $ 190
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<S> <C> <C> <C> <C>
Class A............................................................................... $ 39 $ 59 $ 81 $ 143
Class B............................................................................... $ 14 $ 43 $ 74 $ 146
Class C............................................................................... $ 16 $ 50 $ 87 $ 190
<FN>
The above example with respect to Class A and Class B shares is based on data for the Series' fiscal year ended August 31,
1994. The above example with respect to Class C shares is based on expenses expected to have been incurred if Class C shares
had been in existence during the entire fiscal year ended August 31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor in the Series
will bear, whether directly or indirectly. For more complete descriptions of the various costs and expenses, see "How the Fund
is Managed." "Other Expenses" includes operating expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agency and custodian fees.
- ------------
*Class B shares will automatically convert to Class A shares approximately seven years after purchase. See "Shareholder
Guide--Conversion Feature-- Class B Shares."
+Pursuant to rules of the National Association of Securities Dealers, Inc., the aggregate initial sales charges, deferred
sales charges and asset-based sales charges on shares of the Series may not exceed 6.25% of total gross sales, subject to
certain exclusions. This 6.25% limitation is on each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--Distributor."
++Although the Class A and Class C Distribution and Service Plans provide that the Fund may pay a distribution fee of up to .30
of 1% and 1% per annum of the average daily net assets of the Class A and Class C shares, respectively, the Distributor has
agreed to limit its distribution fees with respect to the Class A and Class C shares of the Series to no more than .10 of 1%
and .75 of 1% of the average daily net asset value of the Class A shares and Class C shares, respectively, for the fiscal
year ending August 31, 1995. Total Fund Operating Expenses of the Class A and Class C shares without such limitations would
be 1.15% and 1.85%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
---------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.64 $11.11 $10.67 $10.23 $10.44
----- ----- ----- ----- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .57 .62 .63 .67 .40
Net realized and unrealized gain
(loss) on investment
transactions...................... (.77) .65 .44 .44 (.21)
----- ----- ----- ----- -------
Total from investment
operations.................... (.20) 1.27 1.07 1.11 .19
----- ----- ----- ----- -------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.57) (.62) (.63) (.67) (.40)
Distributions from net realized
gains............................. (.21) (.12) -- -- --
----- ----- ----- ----- -------
Total distributions............ (.78) (.74) (.63) (.67) (.40)
----- ----- ----- ----- -------
Net asset value, end of period..... $ 10.66 $11.64 $11.11 $10.67 $10.23
----- ----- ----- ----- -------
----- ----- ----- ----- --------
TOTAL RETURN+:..................... (1.75)% 11.89% 10.35% 10.84% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 2,709 $2,930 $1,335 $ 804 $ 349
Average net assets (000)........... $ 2,877 $2,068 $1,080 $ 518 $ 141
Ratios to average net assets:
Expenses, including distribution
fee............................. .95% .96% .96% 1.10% 1.01%**
Expenses, excluding distribution
fee............................. .85% .86% .86% 1.00% .91%**
Net investment income............ 5.18% 5.51% 5.80% 6.07% 6.31%**
Portfolio turnover................. 40% 41% 34% 18% 46%
<FN>
- -------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the last
day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------------------
JANUARY 22,
1985*
YEAR ENDED AUGUST 31, THROUGH
-------------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
-------- ------- ------- ------- ------- ------- ------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23 $ 10.29 $ 10.72 $ 9.93 $ 10.00
-------- ------- ------- ------- ------- ------- ------- --------- --------- -------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .53 .58 .59 .63 .62 .65 .69+ .68+ .76+ .46+
Net realized and
unrealized gain (loss)
on investment
transactions............ (.77) .65 .44 .45 (.25) .25 (.06) (.43) .79 (.07)
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
Total from investment
operations.......... (.24) 1.23 1.03 1.08 .37 .90 .63 .25 1.55 .39
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.53) (.58) (.59) (.63) (.62) (.65) (.69) (.68) (.76) (.46)
Distributions from net
realized gains.......... (.21) (.12) -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
Total
distributions....... (.74) (.70) (.59) (.63) (.62) (.65) (.69) (.68) (.76) (.46)
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
Net asset value, end of
period.................. $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23 $ 10.29 $ 10.72 $ 9.93
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
----- ----- ----- ----- ----- ----- ----- ----- ----- --------
TOTAL RETURN+++:......... (2.13)% 11.43% 9.90% 10.49% 3.58% 9.17% 6.38% 2.29% 16.15% 3.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 51,198 $57,598 $51,313 $51,110 $48,226 $47,409 $39,154 $ 33,287 $ 23,744 $ 9,941
Average net assets
(000)................... $ 55,223 $53,780 $50,970 $48,422 $48,573 $44,243 $35,675 $ 30,537 $ 16,968 $ 6,234
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.35% 1.36% 1.37% 1.49% 1.40% 1.37% 1.24%+ 1.16%+ 1.01%+ .87%+**
Expenses, excluding
distribution fee...... .85% .86% .87% .99% .92% .90% .75%+ .67%+ .52%+ .39%+**
Net investment
income................ 4.77% 5.11% 5.42% 5.70% 5.95% 6.26% 6.67%+ 6.26%+ 6.90%+ 7.13%+**
Portfolio turnover....... 40% 41% 34% 18% 46% 47% 46% 35% 30% 58%
<FN>
- ---------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The Prudential Insurance Company of America as manager
of the Fund.
+++Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class C share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS C
---------------
AUGUST 1,
1994*
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 loss on investment
transactions.......................................... (.03)
------
Total from investment operations................... .02
------
LESS DISTRIBUTIONS
Dividends from net investment income................... (.05)
------
Net asset value, end of period......................... $ 10.67
------
---------
TOTAL RETURN+:......................................... .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 102
Average net assets (000)............................... $ 31
Ratios to average net assets: #
Expenses, including distribution fee................. 2.21%**
Expenses, excluding distribution fee................. 1.47%**
Net investment income................................ 4.75%**
Portfolio turnover..................................... 40%
<FN>
- ---------------
*Commencement of offering of Class C shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of the period reported and includes reinvestment of
dividends. Total return is not annualized.
#Because of the event referred to in * and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that
of Class A or B shares and are not necessarily indicative of future
ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MARYLAND SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM MARYLAND STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MARYLAND STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM MARYLAND STATE AND FEDERAL INCOME TAXES
(MARYLAND OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax (AMT bonds). See "Taxes,
Dividends and Distributions." Under Maryland law, dividends paid by the Series
are exempt from Maryland personal income tax for resident individuals to the
extent they are derived from interest payments on and, in some cases, gain from
the sale of Maryland Obligations, provided, however, that up to 50% of dividends
attributable to interest received by the Series on AMT bonds could be subject to
Maryland individual income tax. Maryland Obligations could include general
obligation bonds of the State, counties, cities, towns, etc., revenue bonds of
utility systems, highways, bridges, port and airport facilities, colleges,
hospitals, etc., and industrial development and pollution control bonds. The
Series will invest in long-term obligations, and the dollar-weighted average
maturity of the Series' portfolio will generally range between 10-20 years. The
Series also may invest in certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL MARYLAND OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Maryland Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Maryland Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Maryland Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MARYLAND OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from Maryland
State and federal income taxes or the Series will have at least 80% of its total
assets invested in Maryland Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper and general
obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Maryland Obligations or may invest
its assets so that more than 20% of the income is subject to Maryland State or
federal income taxes. The Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met. See "Investment Objectives and Policies --
In General" in the Statement of Additional Information.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MARYLAND OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Maryland Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
10
<PAGE>
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the
11
<PAGE>
correlation may be affected by additions to or deletions from the index which
serves as the basis for a futures contract. Finally, if the price of the
security that is subject to the hedge were to move in a favorable direction, the
advantage to the Series would be partially offset by the loss incurred on the
futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MARYLAND OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MARYLAND OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MARYLAND OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. During the three
fiscal years from 1991 through 1993, the State's finances were severely affected
by the national recession. Nevertheless, the State closed fiscal year 1993 with
a $10.5 million operating surplus on a budgetary basis 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,
1992 to a positive balance of $113.9 million on June 30, 1993. The 1995 budget
continues the trend of increased budgetary reserves. By the end of fiscal year
1995, Maryland anticipates a $224 million reserve representing approximately 3%
of General Fund revenues. If either Maryland or any of its local governmental
entities is unable to meet its financial obligations, the income derived by the
Series, the ability to preserve or realize appreciation of the Series' capital
and the Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are
12
<PAGE>
not readily marketable. Securities, including municipal lease obligations, that
have a readily available market are not considered illiquid for the purposes of
this limitation. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .95%, 1.35% and 2.21% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICE. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
13
<PAGE>
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $2,877
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $27,000 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
14
<PAGE>
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $300,400 under the Class B Plan and
received $276,113 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $64,000 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year
15
<PAGE>
period, PSI has complied with the terms of the agreement, no prosecution will be
instituted by the United States for the offenses charged in the complaint. If on
the other hand, during the course of the three year period, PSI violates the
terms of the agreement, the U.S. Attorney can then elect to pursue these
charges. Under the terms of the agreement, PSI agreed, among other things, to
pay an additional $330,000,000 into the fund established by the SEC to pay
restitution to investors who purchased certain PSI limited partnership
interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
16
<PAGE>
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
17
<PAGE>
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for individuals is 28%. The maximum long-term capital gains
rate for corporate shareholders currently is the same as the maximum tax rate
for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
18
<PAGE>
Under Maryland law, dividends paid by the Series are exempt from Maryland
personal income tax for individuals who reside in Maryland to the extent such
dividends are exempt from federal income tax and are derived from interest
payments on Maryland Obligations, provided, however, that up to 50% of dividends
attributable to interest received by the Series on AMT bonds could be subject to
Maryland individual income tax. In addition, capital gains distributions
attributable to those Maryland Obligations issued by the State of Maryland or
its political subdivisions are exempt from Maryland personal income tax.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full
19
<PAGE>
and fractional shares in separate series, currently designated as the Arizona
Series, Connecticut Money Market Series, Florida Series, Georgia Series, Hawaii
Income Series, Maryland Series, Massachusetts Series, Massachusetts Money Market
Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey Money
Market Series, New York Income Series (not presently being offered), New York
Series, New York Money Market Series, North Carolina Series, Ohio Series and
Pennsylvania Series. The Series is authorized to issue an unlimited number of
shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
are identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
21
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
22
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, if may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See " Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-
23
<PAGE>
end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee of .25
of 1% or less) on which no deferred sales load, fee or other charge was imposed
on redemption and (iii) the financial adviser served as the client's broker on
the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits: provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
24
<PAGE>
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
25
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
--------------------------------- -------------------------
<S> <C>
First............................ 5.0%
Second........................... 4.0%
Third............................ 3.0%
Fourth........................... 2.0%
Fifth............................ 1.0%
Sixth............................ 1.0%
Seventh.......................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Pruchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
26
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE
27
<PAGE>
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan -- Class A Shares -- Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
28
<PAGE>
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS......................................................... 2
Risk Factors and Special Characteristics.............................. 2
FUND EXPENSES........................................................... 4
FINANCIAL HIGHLIGHTS.................................................... 5
HOW THE FUND INVESTS.................................................... 8
Investment Objective and Policies..................................... 8
Other Investments and Policies........................................ 12
Investment Restrictions............................................... 13
HOW THE FUND IS MANAGED................................................. 13
Manager............................................................... 13
Distributor........................................................... 14
Portfolio Transactions................................................ 16
Custodian and Transfer and Dividend Disbursing Agent.................. 16
HOW THE FUND VALUES ITS SHARES.......................................... 16
HOW THE FUND CALCULATES PERFORMANCE..................................... 17
TAXES, DIVIDENDS AND DISTRIBUTIONS...................................... 17
GENERAL INFORMATION..................................................... 19
Description of Shares................................................. 19
Additional Information................................................ 20
SHAREHOLDER GUIDE....................................................... 21
How to Buy Shares of the Fund......................................... 21
Alternative Purchase Plan............................................. 22
How to Sell Your Shares............................................... 24
Conversion Feature--Class B Shares.................................... 26
How to Exchange Your Shares........................................... 27
Shareholder Services.................................................. 28
THE PRUDENTIAL MUTUAL FUND FAMILY....................................... A-1
- -------------------------------------------
MF 125A 44404BU
Class A: 74435M-70-5
CUSIP Nos.: Class B: 74435M-80-4
Class C: 74435M-57-2
PROSPECTUS
December 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MARYLAND SERIES)
- -------------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS SERIES)
- ----------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Massachusetts Series) (the
"Series") is one of seventeen series of an open-end, management investment
company, or mutual fund. This Series is diversified and is designed to provide
the maximum amount of income that is exempt from Massachusetts state and federal
income taxes consistent with the preservation of capital and, in conjunction
therewith, the Series may invest in debt securities with the potential for
capital gain. The net assets of the Series are invested in obligations within
the four highest ratings of either Moody's Investors Service or Standard &
Poor's Ratings Group or in unrated obligations which, in the opinion of the
Fund's investment adviser, are of comparable quality. There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Massachusetts Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Massachusetts Series is offered through this
Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Massachusetts state and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Massachusetts state, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto Rico,
the Virgin Islands and Guam, which pay income exempt, in the opinion of counsel,
from Massachusetts state and federal income taxes (Massachusetts Obligations).
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at page
8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Massachusetts Obligations. This
degree of investment concentration makes the Series particularly susceptible to
factors adversely affecting issuers of Massachusetts Obligations. See "How the
Fund Invests--Investment Objective and Policies-- Special Considerations" at
page 12. To hedge against changes in interest rates, the Series may also
purchase put options and engage in transactions involving derivatives, including
financial futures contracts and options thereon. See "How the Fund
Invests--Investment Objective and Policies--Futures Contracts and Options
Thereon" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(Massachusetts Series)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION
EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- ----------------------
Maximum Sales Load
Imposed on Purchases
(as a percentage of 3% None None
offering price)......
Maximum Sales Load or
Deferred Sales Load
Imposed on Reinvested
Dividends............ None None None
Deferred Sales Load
(as a percentage of
original purchase
price or redemption
proceeds, whichever 5% during the first year, 1% on redemptions made
is lower)............ None decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees....... None None None
Exchange Fee.......... None None None
<CAPTION>
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ------------------------- ----------------------
<S> <C> <C> <C>
Management Fees..... .50% .50% .50%
12b-1 Fees.......... .10++ .50 .75++
Other Expenses...... .27 .27 .27
--
--- ---
Total Fund Operating
Expenses........... .87% 1.27% 1.52%
--
--
--- ---
--- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A...................................... $39 $57 $77 $134
Class B...................................... $63 $70 $80 $137
Class C...................................... $25 $48 $83 $181
You would pay the following expenses on the same
investment, assuming no redemption:
Class A...................................... $39 $57 $77 $134
Class B...................................... $13 $40 $70 $137
Class C...................................... $15 $48 $83 $181
The above example with respect to Class A and Class B shares is based on data for the Series'
fiscal year ended August 31, 1994. The above example with respect to Class C shares is based on
expenses expected to have been incurred if Class C shares had been in existence during the entire
fiscal year ended August 31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses
that an investor in the Series will bear, whether directly or indirectly. For more complete
descriptions of the various costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1995. Total Fund Operating Expenses of the Class A and Class C
shares without such limitations would be 1.07% and 1.77%, respectively. See
"How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
JANUARY 22,
YEAR ENDED 1990*
AUGUST 31, THROUGH
--------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $12.17 $11.50 $10.94 $10.44 $ 10.70
------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .67 .68 .69 .70 .41
Net realized and
unrealized gain (loss)
on
investment
transactions............ (.73) .67 .56 .50 (.26)
------ ------ ------ ------ -----------
Total from investment
operations............ (.06) 1.35 1.25 1.20 .15
------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.67) (.68) (.69) (.70) (.41)
Distributions from net
realized gains.......... (.07) -- -- -- --
------ ------ ------ ------ -----------
Total distributions.... (.74) (.68) (.69) (.70) (.41)
------ ------ ------ ------ -----------
Net asset value, end of
period.................. $11.37 $12.17 $11.50 $10.94 $ 10.44
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
TOTAL RETURN+:........... (.58)% 12.10% 11.76% 11.81% 1.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $2,293 $2,325 $ 903 $ 665 $ 257
Average net assets
(000)................... $2,578 $1,336 $ 770 $ 344 $ 127
Ratios to average net
assets:
Expenses, including
distribution fee...... .87% .95% .99% 1.05% 1.04%**
Expenses, excluding
distribution fee...... .77% .85% .89% .95% .95%**
Net investment
income................ 5.60% 5.79% 6.14% 6.53% 6.60%**
Portfolio turnover....... 33% 56% 32% 34% 33%
<FN>
-----------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------
SEPTEMBER 25,
1984*
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------- ------ ------- ------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 12.17 $11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53 $ 10.58 $ 11.47 $ 10.46 $ 10.00
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .61 .63 .64 .65 .65 .68 .71+ .71+ .77+ .76+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.74) .68 .55 .50 (.30) .21 (.05) (.67) 1.02 .46
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total from
investment
operations....... (.13) 1.31 1.19 1.15 .35 .89 .66 .04 1.79 1.22
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.61) (.63) (.64) (.65) (.65) (.68) (.71) (.71) (.77) (.76)
Distributions from
net realized
gains.............. (.07) -- -- -- -- -- -- (.22) (.01) --
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total
distributions.... (.68) (.63) (.64) (.65) (.65) (.68) (.71) (.93) (.78) (.76)
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Net asset value, end
of period.......... $ 11.36 $12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53 $ 10.58 $ 11.47 $ 10.46
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
TOTAL RETURN+++:.... (1.15)% 11.77% 11.23% 11.38% 3.40% 8.67% 6.54% 0.31% 17.94% 12.39%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $55,420 $61,121 $53,449 $49,641 $50,575 $52,754 $ 45,278 $ 40,655 $ 33,041 $15,799
Average net assets
(000).............. $59,544 $55,965 $50,607 $49,083 $52,974 $49,841 $ 41,357 $ 38,462 $ 25,655 $ 8,848
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.27% 1.35% 1.39% 1.45% 1.37% 1.34% 1.22%+ 1.15%+ 1.15%+ .93%+**
Expenses,
excluding
distribution
fee.............. .77% .85% .89% .95% .90% .87% .72%+ .65%+ .67%+ .45%+**
Net investment
income........... 5.20% 5.39% 5.74% 6.13% 6.21% 6.24% 6.76%+ 6.34%+ 6.85%+ 7.53%+**
Portfolio
turnover........... 33% 56% 32% 34% 33% 23% 41% 116% 55% 21%
<FN>
-----------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the period indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-----------------
AUGUST 1,
1994*
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)
------
$11.36
Net asset value, end of period..........
------
------
TOTAL RETURN+:.......................... (.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period............... $ 216
Average net assets...................... $ 15
Ratios to average net assets:#
Expenses, including distribution fee.. 1.57%**
Expenses, excluding distribution fee.. .82%**
Net investment income................. 5.06%**
Portfolio turnover...................... 33%
<FN>
--------------------
* Commencement of offering of Class C shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of the period reported and includes reinvestment of
dividends. Total return is not annualized.
# Because of the event referred to in * and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A or
Class B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MASSACHUSETTS SERIES (THE
SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM MASSACHUSETTS STATE AND FEDERAL INCOME TAXES
CONSISTENT WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE
SERIES MAY INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See
"Investment Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MASSACHUSETTS STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM MASSACHUSETTS STATE AND FEDERAL INCOME
TAXES (MASSACHUSETTS OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Massachusetts law, dividends paid by the Series are exempt
from Massachusetts personal income tax for resident individuals and other
resident noncorporate shareholders to the extent they are derived from interest
payments on Massachusetts Obligations or from long-term capital gains on certain
Massachusetts Obligations. Massachusetts Obligations could include general
obligation bonds of the Commonwealth, counties, cities, towns, etc., revenue
bonds of utility systems, highways, bridges, port and airport facilities,
colleges, hospitals, etc., and industrial development and pollution control
bonds. The Series will invest in long-term obligations, and the dollar-weighted
average maturity of the Series' portfolio will generally range between 10-20
years. The Series also may invest in certain short-term, tax-exempt notes such
as Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL MASSACHUSETTS OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT
GRADE" SECURITIES. In other words, all of the Massachusetts Obligations will, at
the time of purchase, be rated within the four highest quality grades as
determined by either Moody's Investors Service (Moody's) (currently Aaa, Aa, A,
Baa for bonds, MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial
paper) or Standard & Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for
bonds, SP-1, SP-2 for notes and A-1 for commercial paper) or, if unrated, will
possess creditworthiness, in the opinion of the investment adviser, comparable
to securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Massachusetts Obligations
which, in the opinion of the investment adviser, offer the opportunity for
capital appreciation. This may occur, for example, when the investment adviser
believes that the issuer of a particular Massachusetts Obligation might receive
an upgraded credit standing, thereby increasing the market value of the bonds it
has issued or when the investment adviser believes that interest rates might
decline. As a general matter, bond prices and the Series' net asset value will
vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MASSACHUSETTS OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
Massachusetts and federal income taxes or the Series will have at least 80% of
its total assets invested in Massachusetts Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Massachusetts Obligations or may
invest its assets so that more than 20% of the income is subject to
Massachusetts state or federal income taxes. The Series will treat an investment
in a municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MASSACHUSETTS
OBLIGATIONS WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Massachusetts Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
10
<PAGE>
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the
11
<PAGE>
correlation may be affected by additions to or deletions from the index which
serves as the basis for a futures contract. Finally, if the price of the
security that is subject to the hedge were to move in a favorable direction, the
advantage to the Series would be partially offset by the loss incurred on the
futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MASSACHUSETTS OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED
FROM MASSACHUSETTS OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
AFFECTING ISSUERS OF MASSACHUSETTS OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE.
The recent economic downturn had serious adverse effects on Massachusetts'
financial operations leading to a massive accumulated deficit of $1.45 billion
at the close of fiscal 1990. Since that time, Massachusetts has adopted more
conservative revenue forecasting procedures and has moderated spending growth,
resulting in the achievement of balanced budgets in both fiscal 1991-1992 and
fiscal 1992-1993. On a statutory accounting basis, the Commonwealth reported
that the Budgeted Operating Funds ended fiscal year 1993 with balances of $562.5
million. Nevertheless, ongoing spending pressures, continued economic adversity,
a heavy debt load, and recent reform legislation estimated to require spending
of $1.2 billion over three years on school reform, pose significant obstacles to
continued progress. If either Massachusetts or any of its local governmental
entities is unable to meet its financial obligations, the income derived by the
Series, the ability to preserve or realize appreciation of the Series' capital
and the Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
12
<PAGE>
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISOR AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISOR FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .87%, 1.27% and 1.57% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE NET ASSETS OF THE
SERIES. It was incorporated in May 1987 under the laws of the State of Delaware.
For the fiscal year ended August 31, 1994, the Series paid PMF a management fee
of .50 of 1% of the Series' average net assets. See "Manager" in the Statement
of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISOR), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
13
<PAGE>
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $2,578
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $35,100 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net
14
<PAGE>
assets of the Class C shares for the fiscal year ending August 31, 1995.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $298,411 under the Class B Plan and
received $297,719 from the Series under the Class B Plan. Prudential Securities
received approximately $89,800 in contingent deferred sales charges from
redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the
15
<PAGE>
complaint. If on the other hand, during the course of the three year period, PSI
violates the terms of the agreement, the U.S. Attorney can then elect to pursue
these charges. Under the terms of the agreement, PSI agreed, among other things,
to pay an additional $330,000,000 into the fund established by the SEC to pay
restitution to investors who purchased certain PSI limited partnership
interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
16
<PAGE>
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
17
<PAGE>
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Massachusetts law, dividends paid by the Series are exempt from
Massachusetts personal income tax for individuals and other noncorporate
shareholders resident in Massachusetts to the extent such dividends are excluded
from gross income for federal income tax purposes and are derived from interest
payments on Massachusetts Obligations or are capital gain dividends for federal
income tax purposes and are derived from long-term capital gains on certain
Massachusetts Obligations.
18
<PAGE>
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series will elect to treat net
capital losses of approximately $305,000 incurred in the four month period ended
August 31, 1994 as having been incurred in the following fiscal year. Dividends
paid by the Series with respect to each class of shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount except that each class will bear its
own distribution charges, generally resulting in lower dividends for Class B and
Class C shares. Distributions of net capital gains, if any, will be paid in the
same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
19
<PAGE>
Each class of shares represents an interest in the same assets of the Series,
and is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
21
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
22
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
23
<PAGE>
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
24
<PAGE>
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares of the Series to an amount which is lower than
the amount of all payments by you for shares during the preceding six years, in
the case of Class B shares, and one year, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
25
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ ---------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
26
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon as thereafter as practicable. At that time all amounts representing
Class B shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE
27
<PAGE>
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD THE CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan -- Class A Shares -- Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
28
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A
SALES CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
to shareholders which provides for monthly or quarterly checks. Withdrawals
of Class B and Class C shares may be subject to a CDSC. See "How to Sell
Your Shares--Contingent Deferred Sales Charges" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 19
Description of Shares......................... 19
Additional Information........................ 20
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 26
How to Exchange Your Shares................... 27
Shareholder Services.......................... 29
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF119A 44404AW
A: 74435M-65-5
CUSIP Nos.: B: 74435M-66-3
C: 74435M-56-4
PROSPECTUS
December 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MASSACHUSETTS SERIES)
- --------------------------------------
[Logo]
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS MONEY MARKET SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Massachusetts Money Market
Series) (the "Series") is one of seventeen series of an open-end, management
investment company, or mutual fund. This Series is non-diversified and is
designed to provide the highest level of current income that is exempt from
Massachusetts state and federal income taxes consistent with liquidity and the
preservation of capital. The net assets of the Series are invested primarily in
short-term, tax-exempt Massachusetts state, municipal and local debt obligations
and obligations of other qualifying issuers. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225 -1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the
Massachusetts Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated December 30, 1994, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the Massachusetts Money Market
Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from Massachusetts state and federal income
taxes consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term Massachusetts
state, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
Massachusetts state and federal income taxes (Massachusetts Obligations).
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 13.
In seeking to achieve its investment objective, the Series will invest
primarily in Massachusetts Obligations. This degree of investment
concentration makes the Series particularly susceptible to factors adversely
affecting issuers of Massachusetts Obligations. The Series is
non-diversified so that more than 5% of its total assets may be invested in
the securities of one or more issuers. Investment in a non-diversified
portfolio involves more risk than investment in a diversified portfolio. See
"How the Fund Invests--Investment Objective and Policies--Special
Considerations" at page 9.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1994,
PMF served as manager or administrator to 68 investment companies, including
38 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' shares. The Series currently reimburses PMFD for expenses
related to the distribution of the Series' shares at an annual rate of up to
.125 of 1% of the average daily net assets of the Series. See "How the Fund
is Managed--Distributor" at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 22.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Fund through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at the net asset
value per share (NAV) next determined after receipt of your purchase order
by the Transfer Agent or Prudential Securities. See "How the Fund Values its
Shares" at page 13 and "Shareholder Guide-- How to Buy Shares of the Fund"
at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 19.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(MASSACHUSETTS MONEY MARKET SERIES)
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................................ None
Maximum Sales Load Imposed on Reinvested Dividends..................... None
Deferred Sales Load.................................................... None
Redemption Fees........................................................ None
Exchange Fee........................................................... None
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Management Fees (Before Subsidy and Waiver)............................ .500 %
12b-1 Fees............................................................. .125 %
Other Expenses......................................................... .405 %
------
Total Fund Operating Expenses (Before Subsidy and Waiver).............. 1.030 %
------
------
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ----------------------------------------------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $11 $ 33 $ 57 $126
The above example is based on restated data for the Series' fiscal year ended August
31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various costs
and expenses that an investor in the Series will bear, whether directly or indirectly.
For more complete descriptions of the various costs and expenses, see "How the Fund is
Managed." "Other Expenses" includes operating expenses of the Series, such as
Trustees' and professional fees, registration fees, reports to shareholders and
transfer agency and custodian fees.
<FN>
------------------
* Based on expenses incurred during the fiscal year ended August 31, 1994,
without taking into account the management fee waiver. At the current level
of management fee waiver (75%), Management Fees and Total Fund Operating
Expenses would be .10% and .620%, respectively, of the Series' average net
assets. See "How the Fund is Managed--Manager-- Fee Waivers and Subsidy."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, AUGUST 5, 1991*
------------------------- THROUGH
1994 1993 1992 AUGUST 31, 1991
------- ------- ------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00
.019 .021 .034 .003
Net investment income and net realized gains+.....
Dividends and distributions to shareholders....... (.019) (.021) (.034) (.003)
------- ------- ------- ------
Net asset value, end of period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN++:................................... 1.89% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $37,278 $36,608 $18,019 $6,365
Average net assets (000).......................... $42,427 $32,246 $15,477 $3,200
Ratios to average net assets+:
Expenses, including distribution fee.......... .620% .365% .125% .125%**
Expenses, excluding distribution fee.......... .495% .240% .00% .00%**
Net investment income......................... 1.86% 2.11% 3.20% 4.46%**
<FN>
- ------------------------
* Commencement of investment operations.
** Annualized.
+ Net of expense subsidy and/or management fee waiver.
++ 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 the
reinvestment of dividends and distributions. Total returns for periods of less
than a full year are not annualized.
</TABLE>
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING AND ITS "TAX-EQUIVALENT
YIELD." Tax-equivalent yield shows the taxable yield an investor would have to
earn from a fully taxable investment in order to equal the Series' tax-free
yield after taxes and is calculated by dividing the Series' current or effective
yield by the result of one minus the State tax rate times one minus the federal
tax rate. The following is an example of the yield calculations as of August 31,
1994:
<TABLE>
<S> <C>
Value of hypothetical account at end of period......... $1.000436963
Value of hypothetical account at beginning of period... 1.000000000
------------
Base period return..................................... $ .000436963
------------
------------
CURRENT YIELD (.000436963 X (365/7))+.................. 2.28%
EFFECTIVE ANNUAL YIELD, assuming daily compounding+.... 2.30%
TAX-EQUIVALENT CURRENT YIELD (2.28% DIVIDED BY (1 -
46.84%))+............................................. 4.29%
<FN>
- ------------------------
+ After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax-equivalent yield would have been 1.90%, 1.92% and 3.58%,
respectively. See "Manager" in the Statement of Additional Information.
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1994 was 57 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MASSACHUSETTS MONEY MARKET
SERIES (THE SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO
PROVIDE THE HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM MASSACHUSETTS
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF
CAPITAL. THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN SHORT-TERM MASSACHUSETTS STATE, MUNICIPAL AND LOCAL GOVERNMENT
OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED
IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE
OPINION OF COUNSEL, FROM MASSACHUSETTS STATE AND FEDERAL INCOME TAXES
(MASSACHUSETTS OBLIGATIONS). SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THE
STATEMENT OF ADDITIONAL INFORMATION. THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
6
<PAGE>
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Massachusetts law, dividends paid by the Series are exempt
from Massachusetts personal income tax for resident individuals and other
resident noncorporate shareholders to the extent they are excluded from gross
income for federal income tax purposes and are derived from interest payments on
Massachusetts Obligations or are capital gain dividends for federal income tax
purposes and are derived from long-term capital gains on certain Massachusetts
Obligations. The Massachusetts Obligations in which the Series may invest
include certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
certain variable and floating rate demand notes. See "Investment Objectives and
Policies--Tax-Exempt Securities--Tax-Exempt Notes" in the Statement of
Additional Information. The Series will maintain a dollar-weighted average
maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION. There is no limit on the amount of such
securities that the Series may purchase. Floating rate securities normally have
a rate of interest which is set as a specific percentage of a designated base
rate, such as the rate on Treasury Bonds or Bills or the prime rate at a major
commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL MASSACHUSETTS OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
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) OR (II) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY
THE INVESTMENT ADVISER UNDER THE SUPERVISION OF THE TRUSTEES. See "Description
of Tax-Exempt Security Ratings" in the Statement of Additional Information. The
investment adviser will monitor the credit quality of securities purchased for
the Series' portfolio and will limit its investments to those which present
minimal credit risks.
In selecting Massachusetts Obligations for investment by the Series, the
investment adviser considers ratings assigned by major rating services,
information concerning the financial history and condition of the issuer and its
revenue and expense prospects and, in the case of revenue bonds, the financial
history and condition of the source of revenue to service the bonds. If a
Massachusetts Obligation held by the Series is assigned a lower rating or ceases
to be rated, the investment adviser under the supervision of the Trustees will
promptly reassess whether that security presents minimal credit risks and
whether the Series should continue to hold the security in its portfolio. If a
portfolio security no longer presents minimal credit risks or is in default, the
Series will dispose of the security as soon as reasonably practicable unless the
Trustees determine that to do so is not in the best interests of the Series and
its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the Securities and Exchange Commission (SEC). See "How the
Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
7
<PAGE>
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MUNICIPAL OBLIGATIONS WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAXES. As a matter of fundamental policy,
during normal market conditions the Series' assets will be invested so that at
least 80% of its total assets will be invested in municipal securities which pay
income exempt from federal income taxes. These primarily will be Massachusetts
Obligations, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Massachusetts Obligations that also meet the
Series' credit quality and average weighted maturity requirements, to purchase
Massachusetts Obligations. To the extent the Series invests in obligations other
than Massachusetts Obligations, dividends derived therefrom likely will not be
exempt from Massachusetts income taxes. During abnormal market conditions or to
provide liquidity, the Series may hold cash or taxable cash equivalents such as
certificates of deposit, bankers' acceptances and time deposits or other
short-term taxable investments such as repurchase agreements, or high grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation. When, in the opinion of the investment adviser, abnormal market
conditions require a temporary defensive position, the Series may invest its
assets so that more than 20% of the income is subject to federal income taxes.
THE SERIES ALSO MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO
SELL SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) 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 (b) if only one
such rating organization assigned a rating, by that rating organization; 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 two
highest quality grades; or (3) the put is backed by a letter of credit or
similar financial guarantee issued by a person having securities outstanding
which are rated within the two highest quality grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase; the purchase price for such securities
includes interest accrued during the period between purchase and settlement,
and, therefore, no interest accrues to the economic benefit of the purchaser
during such period. In the case of purchases by the Series, the price that the
Series is required to pay on the settlement date may be in excess of the market
value of the municipal obligations on that date. While securities may be sold
prior to the settlement date, the Series intends to purchase these securities
with the purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MASSACHUSETTS
OBLIGATIONS WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Massachusetts Obligations held by the Series reduces
credit risk by providing
8
<PAGE>
that the insurance company will make timely payment of principal and interest if
the issuer defaults on its obligation to make such payment, it does not afford
protection against fluctuation in the price, I.E., the market value, of the
municipal obligations caused by changes in interest rates and other factors.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN MASSACHUSETTS OBLIGATIONS AND
BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM MASSACHUSETTS OBLIGATIONS, IT
IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF MASSACHUSETTS
OBLIGATIONS THAN IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. An investment in the Series
therefore may involve more risk than an investment in other types of money
market funds. The recent economic downturn had serious adverse effects on
Massachusetts' financial operations leading to a massive accumulated deficit of
$1.45 billion at the close of fiscal 1990. Since that time, Massachusetts has
adopted more conservative revenue forecasting procedures and has moderated
spending growth, resulting in the achievement of balanced budgets in both fiscal
1991-1992 and fiscal 1992-1993. On a statutory accounting basis, the
Commonwealth reported that the Budgeted Operating Funds ended fiscal year 1993
with balances of $562.5 million. Nevertheless, ongoing spending pressures,
continued economic adversity, a heavy debt load, and recent reform legislation
estimated to require spending of $1.2 billion over three years on school reform,
pose significant obstacles to continued progress. If either Massachusetts or any
of its local government entities is unable to meet its financial obligations,
the income derived by the Series, the ability to preserve or realize
appreciation of the Series' capital and the Series' liquidity could be adversely
affected.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the SEC. See "Investment Objectives and Policies--
Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
9
<PAGE>
ILLIQUID SECURITIES
The Series may invest up to 10% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such restricted
securities under the supervision of the Trustees. See "Investment Objectives and
Policies--Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of its average net assets were .620%. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid a
management fee of .10 of 1% of the Series' average net assets after waiver. See
"Manager" in the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
Effective November 1, 1993, PMF is waiving 75% of its management fee. During
the fiscal year ended August 31, 1994, PMF voluntarily waived $167,335 of its
management fee (.40 of 1% of average net assets). The Series is not required to
reimburse PMF
10
<PAGE>
for such management fee waiver. Thereafter, PMF may from time to time agree to
waive all or a portion of its management fee and subsidize certain operating
expenses of the Series. Fee waivers and expense subsidies will increase the
Series' yield. See "Fund Expenses" and "Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD OR THE DISTRIBUTOR), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SERIES'
SHARES. IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities Incorporated
(Prudential Securities or PSI) and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, account servicing fees paid
to, or on account of, other broker-dealers or financial institutions (other than
national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses. The State of Texas requires that
shares of the Series may be sold in that state only by dealers or other
financial institutions which are registered there as broker-dealers.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1994, the Series paid PMFD a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers and other persons which distribute shares of the Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
For the fiscal year ended August 31, 1994, PMFD incurred distribution expenses
in the aggregate of $53,034 with respect to the Series, all of which was
recovered through the distribution fee paid by the Series to PMFD. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by
11
<PAGE>
purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Purchases of portfolio securities are made from dealers, underwriters and
issuers; sales prior to maturity are made, for the most part, to dealers and
issuers. The Series does not normally incur any brokerage commission expense on
such transactions. The instruments purchased by the Series generally are 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. Securities purchased in underwritten offerings include a
fixed amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. When securities are purchased or sold
directly from or to an issuer, no commissions or discounts are paid. The policy
of the Series regarding purchases and sales of securities is that primary
consideration will be given to obtaining the most favorable price and efficient
execution of transactions.
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171 serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
12
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state,
13
<PAGE>
municipal and other obligations, the interest on which is excluded from gross
income for federal income tax purposes. During normal market conditions, at
least 80% of the Series' total assets will be invested in such obligations. See
"How the Fund Invests--Investment Objective and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income. The Series does not expect to have
long-term capital gains.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Massachusetts law, dividends paid by the Series are exempt from
Massachusetts personal income tax for individuals and other noncorporate
shareholders resident in Massachusetts to the extent such dividends are excluded
from gross income for federal income tax purposes and are derived from interest
payments on Massachusetts Obligations or are capital gain dividends for federal
income tax purposes and are derived from long-term capital gains on certain
Massachusetts Obligations.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE, OR SUCH
OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN
WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. If you hold shares through
Prudential Securities, you should contact your financial adviser to elect to
receive dividends and distributions in cash. The Fund will notify each
shareholder after the close of the Fund's taxable year of both the dollar amount
and the taxable status of that year's dividends and distributions.
14
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Money Market Series,
Massachusetts Series, Michigan Series, Minnesota Series, New Jersey Money Market
Series, New Jersey Series, New York Income Series (not presently being offered),
New York Money Market Series, New York Series, North Carolina Series, Ohio
Series and Pennsylvania Series. The Fund has received an order from the SEC
permitting the issuance and sale of multiple classes of shares. Currently, all
series of the Fund, except for the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series, the New
York Income Series and the New York Money Market Series, offer three classes,
designated Class A, Class B and Class C shares. The Connecticut Money Market
Series, the Massachusetts Money Market Series, the New Jersey Money Market
Series and the New York Money Market Series offer only one class of shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
15
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment is $1,000. The minimum subsequent investment is $100. All minimum
investment requirements are waived for the Command Account program (if the
Series is designated as your primary fund) and certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD, WITHOUT A SALES CHARGE, AT THE NAV PER SHARE
NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E., CHECK OR FEDERAL FUNDS
WIRED TO PMFS). See "How the Fund Values its Shares." When payment is received
by PMFS prior to 4:30 P .M., New York time, in proper form, a share purchase
order will be entered at the price determined as of 4:30 P .M., New York time,
on that day, and dividends on the shares purchased will begin on the business
day following such investment. See "Taxes, Dividends and Distributions."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
16
<PAGE>
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT. Prudential Securities has advised the Fund that it has
instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of free
credit balances of $1,000 or more ($1.00 for IRAs) (Eligible Credit Balances)
held in such client's account in shares of the Series (Autosweep). To effect the
automatic investment of Eligible Credit Balances representing the proceeds from
the sale of securities, Prudential Securities will enter orders for the purchase
of shares of the Series at the opening of business on the day following the
settlement of such securities transaction; to effect the automatic investment of
Eligible Credit Balances representing non-trade related credits, Prudential
Securities will enter orders for the purchase of shares of the Series at the
opening of business semi-monthly. All shares purchased pursuant to such
procedures will be issued at the NAV of such shares determined on the date the
order is entered and will receive the next dividend declared after such shares
are issued.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed application form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, Massachusetts Money Market Series, specifying on the wire the
account number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day and receive dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (Massachusetts Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
17
<PAGE>
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment for the purchase price of such shares and, in
the case of a new account, a completed application form. You should also submit
an IRS Form W-9. If PMFS receives an order to purchase shares of the Series and
payment in proper form prior to 4:30 P.M., New York time, the purchase order
will be effective that day and you will begin earning dividends the following
business day. See "Taxes, Dividends and Distributions." Checks should be made
payable to Prudential Municipal Series Fund, Massachusetts Money Market Series.
Certified checks are not necessary, but checks must be drawn on a bank located
in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares" below. The minimum initial investment by check is $1,000 and the minimum
subsequent investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-R- Account, including Visa purchases, cash advances and Visa Account
checks. Each Advantage Account Program Securities Account will be automatically
scanned for debits each business day as of the close of business on that day and
after application of any free credit cash balances in the account to such
debits, a sufficient number of shares of the Series (if selected as the primary
fund) and, if necessary, shares of other Advantage Account funds owned by the
Advantage Account Program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PMF
which are not primary Advantage Account funds will be redeemed as of that
business day to satisfy any remaining debits in the Securities Account. Shares
may not be purchased until all debits, overdrafts and other requirements in the
Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command-SM- Account program, an integrated financial services program of
Prudential Securities. Investors having a Command Account may select the Series
as their primary fund. Such investors will have the free credit cash balances of
$1.00 or more in their Securities Account (Available Cash) (a component of the
Command Account program) automatically invested in shares of the Series as
described below. Specifically, an order to purchase shares of the Series is
placed (i) in the case of Available Cash resulting from the proceeds of
securities sales, on
18
<PAGE>
the settlement date of the securities sale, and (ii) in the case of Available
Cash resulting from non-trade related credits (I.E., receipt of dividends and
interest payments, or a cash payment by the participant into his or her
Securities Account), on the business day after receipt by Prudential Securities
of the non-trade related credit. These automatic purchase procedures are also
applicable for Corporate Command Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund. There are no minimum investment requirements for participants in the
Command Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Command Program, such as those incurred by use of the Visa Gold
Account, including Visa purchases, cash advances and Visa Account checks. Each
Command program Securities Account will be automatically scanned for debits
monthly for all Visa purchases incurred during that month and each business day
as of the close of business on that day for all cash advances and check charges
as incurred and after application of any free credit cash balances in the
account to such debits; a sufficient number of shares of the Series and, if
necessary, shares of other Command funds owned by the Command program
participant which have not been selected as his or her primary fund or shares of
a participant's money market funds managed by PMF which are not primary Command
funds will be redeemed as of that business day to satisfy any remaining debits
in the Securities Account. The single monthly debit for Visa purchases will be
made on the twenty-fifth day of each month, or the prior business day if the
twenty-fifth falls on a weekend or holiday. Margin loans will be utilized to
satisfy debits remaining after the liquidation of all shares of the Series in a
Securities Account, and shares may not be purchased until all debits, margin
loans and other requirements in the Securities Account are satisfied. Command
Account participants will not be entitled to dividends declared on the date of
redemption.
For information on participation in the Command Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
Shares for which a redemption request is received by PMFS prior to 4:30 P .M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
19
<PAGE>
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest higher dollar
unless the client notifies Prudential Securities to the contrary. The amount of
the redemption will be the lesser of (a) the total net asset value of the
Series' shares held in the client's Prudential Securities account or (b) the
deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client utilizing this automatic redemption procedure and who wishes
to pay for a securities transaction or satisfy any other debit balance in his or
her account other than through this automatic redemption procedure must do so
not later than the day of settlement for such securities transaction or the date
the debit balance is incurred. Prudential Securities clients who have elected to
utilize Autosweep will not be entitled to dividends declared on the date of
redemption.
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth above and the form returned to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time,
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services, Inc., at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an
20
<PAGE>
account for which Expedited Redemption is requested has a net asset value of
less than $200, the entire account must be redeemed. The proceeds of redeemed
shares in the amount of $1,000 or more are transmitted by wire to your account
at a domestic commercial bank which is a member of the Federal Reserve System.
Proceeds of less than $1,000 are forwarded by check to your designated bank
account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C
shares of other series of the Fund or Class C shares of the Prudential Mutual
Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABIITY OR COST
WHICH RESULTS FROM ACTING
21
<PAGE>
UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER THE FOREGOING
PROCEDURES. All exchanges will be made on the basis of the relative NAV of the
two funds (or series) next determined after the request is received in good
order. The Exchange Privilege is made available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should
contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic charge to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
for shareholders which provides for monthly or quarterly checks. See "How to
Sell Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may
open a single master account by filing an application form with the Transfer
Agent. Attention: Customer Service, P.O. Box 15005, New Brunswick, New
Jersey 08906, signed by personnel authorized to act for the institution.
Individual sub-accounts may be opened at the time the master account is
opened by listing them, or they may be added at a later date by written
advice or by filing forms supplied by the Fund. Procedures are available to
identify sub-accounts by name and number within the master account name. The
investment minimums set forth above are applicable to the aggregate amounts
invested by a group and not to the amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges discribed
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
22
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund. Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................ 2
Risk Factors and Special Characteristics..... 2
FUND EXPENSES.................................. 4
FINANCIAL HIGHLIGHTS........................... 5
CALCULATION OF YIELD........................... 6
HOW THE FUND INVESTS........................... 6
Investment Objective and Policies............ 6
Other Investments and Policies............... 9
Investment Restrictions...................... 10
HOW THE FUND IS MANAGED........................ 10
Manager...................................... 10
Distributor.................................. 11
Portfolio Transactions....................... 12
Custodian and Transfer and
Dividend Disbursing Agent................... 12
HOW THE FUND VALUES ITS SHARES................. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 13
GENERAL INFORMATION............................ 15
Description of Shares........................ 15
Additional Information....................... 15
SHAREHOLDER GUIDE.............................. 16
How to Buy Shares of the Fund................ 16
How to Sell Your Shares...................... 19
How to Exchange Your Shares.................. 21
Shareholder Services......................... 22
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
-------------------------------------------
MF139A 444240c
</TABLE>
CUSIP No: 74435M-63-0
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL SERIES
FUND
(MASSACHUSETTS MONEY MARKET SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MICHIGAN SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Michigan Series) (the "Series")
is one of seventeen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from Michigan State and federal income taxes
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested in obligations within the four highest
ratings of either Moody's Investors Service or Standard & Poor's Ratings Group
or in unrated obligations which, in the opinion of the Fund's investment
adviser, are of comparable quality. There can be no assurances that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is One Seaport Plaza, New York, New
York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Michigan Series that a prospective investor should to know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Michigan Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Michigan State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Michigan
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay income exempt, in the opinion of counsel, from Michigan
State and federal income taxes (Michigan Obligations). There can be no
assurances that the Series' investment objective will be achieved. See "How the
Fund Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Michigan Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Michigan Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class A
shares (which are subject to lower ongoing
distribution-related expenses) approximately seven
years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares but do not convert to another
class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide-- How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(MICHIGAN SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- -------------------- ---------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)........................ 3% None None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends................................. None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever is
lower)............................................... None 5% during the first 1% on
year, decreasing by redemptions
1% annually to 1% in made within one
the fifth and sixth year of
years and 0% the purchase
seventh year*
Redemption Fees....................................... None None None
Exchange Fee.......................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------- ------------------------ -------------------
<S> <C> <C> <C>
Management Fees....................................... .50% .50% .50%
12b-1 Fees............................................ .10++ .50 .75++
Other Expenses........................................ .31 .31 .31
--- --- ---
Total Fund Operating Expenses......................... .91% 1.31% 1.56%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A................................................................ $39 $ 58 $ 79 $139
Class B................................................................ $63 $ 72 $ 82 $142
Class C................................................................ $26 $ 49 $ 85 $186
You would pay the following expenses on the same investment, assuming no
redemption:
Class A................................................................ $39 $ 58 $ 79 $139
Class B................................................................ $13 $ 42 $ 72 $142
Class C................................................................ $16 $ 49 $ 85 $186
The above example with respect to Class A and Class B shares is based on data
for the Series' fiscal year ended August 31, 1994. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the entire fiscal year ended August
31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1995. Total Fund Operating Expenses of the Class A and Class C
shares without such limitations would be 1.11% and 1.81%, respectively. See
"How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
---------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
------ ------ ------- ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $12.51 $11.90 $ 11.30 $10.81 $11.02
------ ------ ------- ------ -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .64 .67 .68 .67 .41
Net realized and unrealized gain
(loss) on investment
transactions...................... (.69) .71 .60 .49 (.21)
------ ------ ------- ------ -----------
Total from investment
operations.................... (.05) 1.38 1.28 1.16 .20
------ ------ ------- ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.64) (.67) (.68) (.67) (.41)
Distributions from net realized
gains............................. (.07) (.10) -- -- --
------ ------ ------- ------ -----------
Total distributions............ (.71) (.77) (.68) (.67) (.41)
------ ------ ------- ------ -----------
Net asset value, end of period..... $11.75 $12.51 $ 11.90 $11.30 $10.81
------ ------ ------- ------ -----------
------ ------ ------- ------ -----------
TOTAL RETURN+:..................... (0.38)% 11.95% 11.63% 11.04% 1.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $4,706 $3,814 $ 1,618 $ 835 $ 501
Average net assets (000)........... $4,505 $2,285 $ 1,235 $ 694 $ 365
Ratios to average net assets:
Expenses, including distribution
fee............................. .91% .96%# .98% 1.09% 1.09%**
Expenses, excluding distribution
fee............................. .81% .86%# .88% .99% .99%**
Net investment income............ 5.27% 5.51%# 5.82% 6.09% 6.25%**
Portfolio turnover................. 12% 14% 30% 62% 55%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
# Restated
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------
SEPTEMBER
22, 1984*
YEAR ENDED AUGUST 31, THROUGH
-------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 12.51 $11.90 $11.30 $10.81 $11.03 $10.57 $ 10.85 $ 11.94 $ 10.50 $10.00
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... .59 .62 .63 .63 .65 .68 .72+ .73+ .82+ .77+
Net realized and unrealized
gain (loss) on investment
transactions.............. (.69) .71 .60 .49 (.22) .46 (.28) (.44) 1.44 .50
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
Total from investment
operations............ (.10) 1.33 1.23 1.12 .43 1.14 .44 .29 2.26 1.27
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
LESS DISTRIBUTIONS
Dividends from net
investment income......... (.59) (.62) (.63) (.63) (.65) (.68) (.72) (.73) (.82) (.77)
Distributions from net
realized gains............ (.07) (.10) -- -- -- -- -- (.65) -- --
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
Total distributions.... (.66) (.72) (.63) (.63) (.65) (.68) (.72) (1.38) (.82) (.77)
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
Net asset value, end of
period.................... $ 11.75 $12.51 $11.90 $11.30 $10.81 $11.03 $ 10.57 $ 10.85 $ 11.94 $10.50
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
---------- ------ ------ ------ ------ ------ ------- ------- ------- ----------
TOTAL RETURN+++:........... (0.78)% 11.51% 11.18% 10.60% 4.02% 11.08% 4.34% 2.52% 22.38% 12.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)..................... $70,112 $70,302 $56,095 $59,400 $49,923 $47,025 $40,489 $40,597 $32,139 1$6,811
Average net assets (000)... $72,095 $61,548 $52,137 $50,809 $48,694 $43,957 $39,246 $39,088 $25,698 3$7,263
Ratios to average net
assets:
Expenses, including
distribution fee........ 1.31% 1.36%# 1.38% 1.49% 1.44% 1.35% 1.20%+ 1.13%+ 1.14%+ .92%+**
Expenses, excluding
distribution fee........ .81% .86%# .88% .99% .97% .96% .72%+ .66%+ .66%+ .44%+**
Net investment income.... 4.87% 5.11%# 5.42% 5.66% 5.95% 6.20% 6.85%+ 6.40%+ 7.07%+ 7.53%+**
Portfolio turnover......... 12% 14% 30% 62% 55% 36% 156% 105% 123% 36%
<FN>
- ---------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
# Restated
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class C share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-----------------
AUGUST 1,
1994*
THROUGH
AUGUST 31,
1994
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.78
------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------
Net investment income................... .04
Net realized and unrealized loss on
investment transactions................ (.03)
------
Total from investment operations.... .01
------
LESS DISTRIBUTIONS
- ----------------------------------------
Dividends from net investment income.... (.04)
------
Net asset value, end of period.......... $ 11.75
------
------
TOTAL RETURN+:.......................... 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period............... $ 200
Average net assets...................... $ 199
Ratios to average net assets:#
Expenses, including distribution fee.. 2.15%**
Expenses, excluding distribution fee.. 1.39%**
Net investment income................. 4.56%**
Portfolio turnover...................... 12%
<FN>
- ---------------
* Commencement of offering of Class C shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends.
Total return is not annualized.
# Because of the event referred to in * and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A or
Class B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND,
CONSISTING OF SEVENTEEN SEPARATE SERIES. EACH OF THESE SERIES IS MANAGED
INDEPENDENTLY. THE MICHIGAN SERIES (THE SERIES) IS DIVERSIFIED AND ITS
INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM MICHIGAN
STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL AND,
IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives and Policies" in the
Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MICHIGAN STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM MICHIGAN STATE AND FEDERAL INCOME TAXES
(MICHIGAN OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Michigan law, dividends paid by the Series are exempt from
Michigan income tax and single business tax for resident individuals and
corporations to the extent they are derived from interest payments on Michigan
Obligations. Michigan Obligations could include general obligation bonds of the
State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for the inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL MICHIGAN OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Michigan Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Michigan Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Michigan Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MICHIGAN OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from Michigan
State and federal income taxes or the Series will have at least 80% of its total
assets invested in Michigan Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper and general
obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances, time deposits or other short-term
taxable investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Michigan Obligations or may invest its assets so that more
than 20% of the income is subject to Michigan State or federal income taxes. The
Series will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MICHIGAN OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Michigan Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
10
<PAGE>
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the
11
<PAGE>
correlation may be affected by additions to or deletions from the index which
serves as the basis for a futures contract. Finally, if the price of the
security that is subject to the hedge were to move in a favorable direction, the
advantage to the Series would be partially offset by the loss incurred on the
futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MICHIGAN OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MICHIGAN OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MICHIGAN OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Michigan
encountered financial difficulties during the late 1980's, largely as a result
of poor conditions in the automotive industry, but has recovered from the
prolonged downturn in production levels in this sector. The State Senate's
Fiscal Agency forecast predicts continued improvement in the economy of Michigan
through 1995, largely due to the improvement in motor vehicle sales and growth
in the State's service industry, wholesale and retail trade and construction
sector. Despite budget problems of over-estimation of revenues and
under-estimation of expenses and the resulting drawdown on the State's Budget
Stabilization Fund in recent years, for fiscal 1993 the State achieved a budget
surplus as a result of accounting adjustments and other payment deferrals and
for fiscal year 1994 a budget surplus is projected. In July 1993 the Michigan
Legislature eliminated the ability of school districts to levy property taxes
for operations. In response, in 1994 voters approved a proposal that replaces
this school funding property tax system with certain new excise taxes and an
increased sales tax. The market value and the marketability of Michigan
Obligations may be affected adversely by the same factors that affect Michigan's
economy generally. If either Michigan or any of its local governmental entities
is unable to meet its financial obligations, the income derived by the Series,
the ability to preserve or realize appreciation of the Series' capital and the
Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
12
<PAGE>
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .91%, 1.31% and 2.15% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since December 1994 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
13
<PAGE>
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $4,506
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $47,900 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
14
<PAGE>
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $562,100 under the Class B Plan and
received $360,476 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $95,800 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal
15
<PAGE>
securities laws. An agreement was simultaneously filed to defer prosecution of
these charges for a period of three years from the signing of the agreement,
provided that PSI complies with the terms of the agreement. If, upon completion
of the three year period, PSI has complied with the terms of the agreement, no
prosecution will be instituted by the United States for the offenses charged in
the complaint. If on the other hand, during the course of the three year period,
PSI violates the terms of the agreement, the U.S. Attorney can then elect to
pursue these charges. Under the terms of the agreement, PSI agreed, among other
things, to pay an additional $330,000,000 into the fund established by the SEC
to pay restitution to investors who purchased certain PSI limited partnership
interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
16
<PAGE>
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market"
17
<PAGE>
for federal income tax purposes; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on these "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. See
"Distributions and Tax Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitute a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
18
<PAGE>
Under Michigan law, dividends paid by the Series that are derived from
interest payments attributable to Michigan Obligations are exempt from Michigan
income tax and any income taxes imposed by cities in Michigan for individuals
who reside in Michigan and from the Michigan single business tax for
corporations that are subject to such tax to the extent such dividends are
exempt from federal income tax (except for possible application of the
alternative minimum tax). An investment in the Series, to the extent
attributable to interest on Michigan Obligations, will also be excluded from the
Michigan intangibles tax.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida
19
<PAGE>
Series, Georgia Series, Hawaii Income Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series,
Michigan Series, Minnesota Series, New Jersey Series, New Jersey Money Market
Series, New York Income Series (not presently being offered), New York Series,
New York Money Market Series, North Carolina Series, Ohio Series and
Pennsylvania Series. The Series is authorized to issue an unlimited number of
shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
are identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
21
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
22
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-
23
<PAGE>
end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee of .25
of 1% or less) on which no deferred sales load, fee or other charge was imposed
on redemption and (iii) the financial adviser served as the client's broker on
the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
24
<PAGE>
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
25
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------ ------------------------
<S> <C>
First..................................... 5.0%
Second.................................... 4.0%
Third..................................... 3.0%
Fourth.................................... 2.0%
Fifth..................................... 1.0%
Sixth..................................... 1.0%
Seventh................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
26
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the
27
<PAGE>
redemption of shares exchanged will be calculated from the first day of the
month after the initial purchase, excluding the time shares were held in a money
market fund. Class B and Class C shares may not be exchanged into money market
funds other than Prudential Special Money Market Fund. For purposes of
calculating the holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A
SALES CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales
28
<PAGE>
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares
through Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
to shareholders which provides for monthly or quarterly checks. Withdrawals
of Class B and Class C shares may be subject to a CDSC. See "How to Sell
Your Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
One Seaport Plaza, New York, New York 10292, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555
(collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
-COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
-INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those contained
in this Prospectus, in connection with the offer contained herein, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 19
Description of Shares......................... 19
Additional Information........................ 20
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 26
How to Exchange Your Shares................... 27
Shareholder Services.......................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF 120A 44404CS
Class A: 74435M-67-1
CUSIP Nos.: Class B: 74435M-68-9
Class C: 74435M-55-6
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MICHIGAN SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MINNESOTA SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Minnesota Series) (the "Series")
is one of seventeen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from Minnesota personal income and federal
income taxes consistent with the preservation of capital and, in conjunction
therewith, the Series may invest in debt securities with the potential for
capital gain. The net assets of the Series are invested in obligations within
the four highest ratings of either Moody's Investors Service or Standard &
Poor's Ratings Group or in unrated obligations which, in the opinion of the
Fund's investment adviser, are of comparable quality. There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Minnesota Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Minnesota Series is offered through this
Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Minnesota personal income and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Minnesota State, municipal and local government obligations and
obligations of certain Indian tribal governments which pay income exempt, in the
opinion of counsel, from regular Minnesota personal income and federal income
taxes (Minnesota Obligations). There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Minnesota Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Minnesota Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 11.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to higher
ongoing distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(MINNESOTA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------- ---------------------- ---------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage 3% None None
of offering price).....................................
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends................................... None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever is
lower)................................................. None 5% during the first 1% on redemptions
year, decreasing by 1% made within one year
annually to 1% in the of purchase
fifth and sixth years
and 0% the seventh
year*
Redemption Fees......................................... None None None
Exchange Fee............................................ None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------- ---------------------- ---------------------
<S> <C> <C> <C>
Management Fees......................................... .50% .50% .50%
12b-1 Fees.............................................. .10++ .50 .75++
Other Expenses.......................................... .65 .65 .65
--- --- ---
Total Fund Operating Expenses........................... 1.25% 1.65% 1.90%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
Class A ................................................................ $ 42 $ 68 $ 97 $ 177
Class B ................................................................ $ 67 $ 82 $ 100 $ 180
Class C................................................................. $ 29 $ 60 $ 103 $ 222
You would pay the following expenses on the same investment, assuming no
redemption:
Class A ................................................................ $ 42 $ 68 $ 97 $ 177
Class B ................................................................ $ 17 $ 52 $ 90 $ 180
Class C................................................................. $ 19 $ 60 $ 103 $ 222
The above example with respect to Class A and Class B shares is based on data
for the Series' fiscal year ended August 31, 1994. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the entire fiscal year ended August
31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
+Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to the Class A and Class C shares of the Series to no more than .10
of 1% and .75 of 1% of the average daily net asset value of the Class A
shares and Class C shares, respectively, for the fiscal year ending August
31, 1995. Total Fund Operating Expenses of the Class A and Class C shares
without such limitations would be 1.45% and 2.15%, respectively. See "How
the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class A share
of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. This
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
--------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $12.33 $11.78 $11.40 $10.98 $11.14
------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .58 .62 .66 .64 .39
Net realized and
unrealized gain (loss)
on investment
transactions............ (.68) .57 .38 .42 (.16)
------ ------ ------ ------ -----------
Total from investment
operations.......... (.10) 1.19 1.04 1.06 .23
------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.58) (.62) (.66) (.64) (.39)
Distributions from net
realized gains.......... (.09) (.02) -- -- --
------ ------ ------ ------ -----------
Total
distributions....... (.67) (.64) (.66) (.64) (.39)
------ ------ ------ ------ -----------
Net asset value, end of
period.................. $11.56 $12.33 $11.78 $11.40 $10.98
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
TOTAL RETURN+:........... (0.87)% 10.45% 9.38% 9.93% 2.00%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $1,287 $894 $402 $229 $130
Average net assets
(000)................... $1,179 $616 $291 $202 $ 87
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.25% 1.29% 1.22% 1.41% 1.46%**
Expenses, excluding
distribution fees..... 1.15% 1.19% 1.11% 1.31% 1.33%**
Net investment
income................ 4.84% 5.15% 5.69% 5.73% 5.80%**
Portfolio turnover....... 21% 27% 32% 56% 30%
<FN>
-----------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the
indicated periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1994, have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
the notes thereto, which appear in the Statement of Additional Information.
The following financial highlights contain selected data for a Class B share
of beneficial interest outstanding, total return, ratios to average net
assets and other supplemental data for the periods indicated. This
information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------------
OCTOBER 4,
1984*
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $12.33 $11.78 $11.41 $10.98 $11.14 $10.80 $11.03 $11.56 $10.47 $10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income................ .53 .58 .61 .60 .62 .66+ .72+ .72+ .79+ .68+
Net realized and
unrealized gain (loss)
on investment
transactions.......... (.68) .57 .37 .43 (.16) .34 (.23) (.34) 1.12 .47
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
Total from
investment
operations........ (.15) 1.15 .98 1.03 .46 1.00 .49 .38 1.91 1.15
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment income..... (.53) (.58) (.61) (.60) (.62) (.66) (.72) (.72) (.79) (.68)
Distributions from net
realized gains........ (.09) (.02) -- -- -- -- -- (.19) (.03) --
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
Total
distributions..... (.62) (.60) (.61) (.60) (.62) (.66) (.72) (.91) (.82) (.68)
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
Net asset value, end of
period................ $ 11.56 $12.33 $11.78 $11.41 $10.98 $11.14 $10.80 $11.03 $11.56 $10.47
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- ------- ------- ------- ------- -----------
TOTAL RETURN+++:....... (1.26)% 9.99% 8.83% 9.64% 4.20% 9.51% 4.68% 3.39% 18.96% 12.44%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000).......... $24,489 $26,565 $24,746 $23,600 $24,080 $22,933 $19,202 $16,868 $9,936 $4,280
Average net assets
(000)................. $26,113 $25,387 $24,038 $23,997 $23,558 $21,198 $17,692 $13,865 $7,290 $2,329
Ratios to average net
assets:
Expenses, including
distribution fee.... 1.65% 1.69% 1.62% 1.81% 1.78% 1.64%+ 1.08%+ .96%+ .97%+ .89%**+
Expenses, excluding
distribution fees... 1.15% 1.19% 1.12% 1.31% 1.28% 1.17%+ .58%+ .48%+ .48%+ .42%**+
Net investment
income.............. 4.44% 4.75% 5.29% 5.33% 5.49% 5.87%+ 6.65%+ 6.18%+ 6.84%+ 7.17%**+
Portfolio turnover..... 21% 27% 32% 56% 30% 31% 71% 103% 27% 30%
<FN>
---------------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated
period)
(Class C Shares)
The following financial highlights have been audited by Deloitte &
Touche LLP, independent accountants, whose report thereon was unqualified.
This information should be read in conjunction with the financial statements
and the notes thereto, which appear in the Statement of Additional
Information. The following financial highlights contain selected data for a
Class C share of beneficial interest outstanding, total return, ratios to
average net assets and other supplemental data for the period indicated.
This information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-----------
AUGUST 1,
1994*
THROUGH
AUGUST 31,
1994
-----------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.63
-----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .04
(.07)
Net realized and
unrealized gain (loss)
on investment
transactions............
-----------
Total from investment
operations.......... (.03)
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.04)
-----------
Net asset value, end of
period.................. $ 11.56
-----------
-----------
TOTAL RETURN+:........... (0.38)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period.................. $ 199
Average net assets....... $ 200
Ratios to average net
assets:@
Expenses, including
distribution fee...... 2.15%**
Expenses, excluding
distribution fee...... 1.40%**
Net investment
income................ 3.86%**
Portfolio turnover....... 21%
<FN>
---------------------
* Commencement of offering of Class C shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of the period reported and includes reinvestment of
dividends. Total return is not annualized.
@Because of the event referred to in * and the timing of such, the ratios for
the Class C shares are not necessarily comparable to that of the Class A or
B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MINNESOTA SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM MINNESOTA PERSONAL INCOME AND FEDERAL INCOME TAXES CONSISTENT
WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY
INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment
Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MINNESOTA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF CERTAIN INDIAN TRIBAL GOVERNMENTS
WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL, FROM REGULAR MINNESOTA
PERSONAL INCOME AND FEDERAL INCOME TAXES (MINNESOTA OBLIGATIONS). THERE CAN BE
NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal and Minnesota alternative minimum taxes. The Series may
invest without limit in municipal obligations that are "private activity bonds"
(as defined in the Internal Revenue Code) the interest on which would be a
preference item for purposes of the federal and Minnesota alternative minimum
taxes. See "Taxes, Dividends and Distributions." Under Minnesota law,
exempt-interest dividends paid by the Series that are derived from interest
income on Minnesota Obligations are excluded from the Minnesota taxable net
income of individuals, estates and trusts, provided that the portion of the
exempt-interest dividends from such Minnesota sources paid to all shareholders
represents 95% or more of the exempt-interest dividends paid by the Series. The
Series intends to comply with this requirement. Minnesota Obligations could
include general obligation bonds of the State, counties, cities, towns, etc.,
revenue bonds of utility systems, highways, bridges, port and airport
facilities, colleges, hospitals, etc., and industrial development and pollution
control bonds. The Series will invest in long-term obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic
8
<PAGE>
adjustment in the interest rate based on prevailing market rates and generally
would allow the Series to demand payment of the obligation on short notice at
par plus accrued interest, which amount may be more or less than the amount the
Series paid for them. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another security or the value of an index. Changes in the interest rate on
the other security or index inversely affect the residual interest rate paid on
the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL MINNESOTA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Minnesota Obligations will, at the time
of purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Minnesota Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Minnesota Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MINNESOTA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from regular
Minnesota State personal income and federal income taxes or the Series will have
at least 80% of its total assets invested in Minnesota Obligations. During
abnormal market conditions or to provide liquidity, the Series may hold cash or
cash equivalents or investment grade taxable obligations, including obligations
that are exempt from federal, but not state, taxation and the Series may invest
in tax-free cash equivalents, such as floating rate demand notes, tax-exempt
commercial paper, and general obligation and revenue notes, or in taxable cash
equivalents, such as certificates of deposit, bankers acceptances and time
deposits or other short-term taxable investments such as repurchase agreements.
When, in the opinion of the investment adviser, abnormal market conditions
require a temporary defensive position, the Series may invest more than 20% of
the value of its assets in debt securities other than Minnesota Obligations or
may invest
9
<PAGE>
its assets so that more than 20% of the income is subject to Minnesota personal
income or federal income taxes. In all cases, however, the Series intends to
comply with the 95% test discussed above. The Series will treat an investment in
a municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MINNESOTA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Minnesota Obligations held by the Series reduces
credit risk by providing that
10
<PAGE>
the insurance company will make timely payment of principal and interest if the
issuer defaults on its obligation to make such payment, it does not afford
protection against fluctuation in the price, I.E., the market value, of the
municipal obligations caused by changes in interest rates and other factors, nor
in turn against fluctuations in the net asset value of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
11
<PAGE>
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MINNESOTA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MINNESOTA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MINNESOTA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. The Minnesota
Department of Finance has projected a State General Fund balance of $268 million
at the end of the current biennium, June 30, 1995, plus a budget reserve of $500
million. Total projected expenditures and transfers for the biennium are $16.9
billion. The projected surplus, however, does not reflect the effects of a
recent decision of the Minnesota Supreme Court pursuant to which the State will
be required to pay approximately $351 million in tax refunds and interest over a
four-year period. If either Minnesota or any of its local governmental entities
is unable to meet its financial obligations, the income derived by the Series,
the ability to preserve or realize appreciation of the Series' capital and the
Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
12
<PAGE>
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were 1.25%, 1.65% and 2.15% (annualized) for
the Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since December 1994 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
13
<PAGE>
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PMFD has agreed to limit its distribution-related fees
payable under the Class A Plan to .10 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $1,179
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $20,000 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the
14
<PAGE>
Class C shares. The service fee is used to pay for personal service and/or the
maintenance of shareholder accounts. Prudential Securities has agreed to limit
its distribution-related fees payable under the Class C Plan to .75 of 1% of the
average daily net assets of the Class C shares for the fiscal year ending August
31, 1995. Prudential Securities also receives contingent deferred sales charges
from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $177,900 under the Class B Plan and
received $130,567 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $41,900 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the
15
<PAGE>
signing of the agreement, provided that PSI complies with the terms of the
agreement. If, upon completion of the three year period, PSI has complied with
the terms of the agreement, no prosecution will be instituted by the United
States for the offenses charged in the complaint. If on the other hand, during
the course of the three year period, PSI violates the terms of the agreement,
the U.S. Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
16
<PAGE>
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
17
<PAGE>
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Minnesota law, exempt-interest dividends paid by the Series that are
derived from interest income on Minnesota Obligations are excluded from the
Minnesota taxable net income of individuals, estates and trusts, provided that
the portion of the exempt-interest dividends from such Minnesota sources paid to
all shareholders represents 95% or more of the exempt-interest
18
<PAGE>
dividends paid by the Series. In certain cases, however, exempt-interest
dividends that are paid by the Series will be subject to the Minnesota
alternative minimum tax. Exempt-interest dividends are not excluded from the
Minnesota taxable income of corporations and financial institutions.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any distributions are paid, will
be calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class will bear its own distribution
charges, generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series,
19
<PAGE>
Michigan Series, Minnesota Series, New Jersey Series, New Jersey Money Market
Series, New York Income Series (not presently being offered), New York Series,
New York Money Market Series, North Carolina Series, Ohio Series and
Pennsylvania Series. The Series is authorized to issue an unlimited number of
shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
21
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
22
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-
23
<PAGE>
end, non-money market fund sponsored by the financial adviser's previous
employer (other than a fund which imposes a distribution or service fee of .25
of 1% or less) on which no deferred sales load, fee or other charge was imposed
on redemption and (iii) the financial adviser served as the client's broker on
the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
24
<PAGE>
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
25
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
OF DOLLARS INVESTED OR
YEAR SINCE PURCHASE PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- --------------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
26
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after the expiration of
the conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
27
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD THE CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
28
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 19
Description of Shares......................... 19
Additional Information........................ 20
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 27
How to Exchange Your Shares................... 28
Shareholder Services.......................... 29
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- ------------------------------------------------
MF121A 44404DQ
Class A: 74435M-69-7
CUSIP Nos.:Class B: 74435M-71-3
Class C: 74435M-54-9
PROSPECTUS
DECEMBER 30, 1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MINNESOTA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW JERSEY SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New Jersey Series) (the "Series")
is one of seventeen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from New Jersey State income tax and federal
income tax consistent with the preservation of capital and, in conjunction
therewith, the Series may invest in debt securities with the potential for
capital gain. The net assets of the Series are invested in obligations within
the four highest ratings of either Moody's Investors Service or Standard &
Poor's Ratings Group or in unrated obligations which, in the opinion of the
Fund's investment adviser, are of comparable quality. There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the New
Jersey Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the New Jersey Series is offered through
this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from New Jersey State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in New Jersey State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay income exempt, in the opinion of
counsel, from New Jersey State and federal income taxes (New Jersey
Obligations). There can be no assurance that the Series' investment objective
will be achieved. See "How the Fund Invests--Investment Objective and
Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in New Jersey Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of New Jersey Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at
page 12. To hedge against changes in interest rates, the Series may also
purchase put options and engage in transactions involving derivatives,
including financial futures contracts and options thereon. See "How the Fund
Invests--Investment Objective and Policies--Futures Contracts and Options
Thereon" at page 11.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Series' average daily net assets. As of September 30, 1994, PMF served
as manager or administrator to 68 investment companies, including 38 mutual
funds, with aggregate assets of approximately $47 billion. The Prudential
Investment Corporation (PIC or the Subadviser) furnishes investment advisory
services in connection with the management of the Fund under a Subadvisory
Agreement with PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service
fee which is currently being charged at the rate of .75 of 1% of the average
daily net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide-- Shareholder Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A
shares) or (ii) on a deferred basis (Class B or Class C shares). See "How the
Fund Values its Shares" at page 17 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3%
of the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge
or CDSC (declining from 5% to zero of the
lower of the amount invested or the
redemption proceeds) which will be imposed on
certain redemptions made within six years of
purchase. Although Class B shares are subject
to higher ongoing distribution-related
expenses than Class A shares, Class B shares
will automatically convert to Class A shares
(which are subject to lower ongoing
distribution-related expenses) approximately
seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for
one year after purchase, are subject to a 1%
CDSC on redemptions. Like Class B shares,
Class C shares are subject to higher ongoing
distribution-related expenses than Class A
shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income,if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested
in additional shares of the Series at NAV without a sales charge unless you
request that they be paid to you in cash. See "Taxes, Dividends and
Distributions" at page 18.
3
<PAGE>
FUND EXPENSES
(NEW JERSEY SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------------- ---------------------------- --------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as 3% None None
a percentage of offering price)...........
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends........... None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None 5% during the first year, 1% on redemptions
decreasing by 1% annually to made within one year
1% in the fifth and sixth of purchase
years and 0% the seventh
year*
Redemption Fees............................ None None None
Exchange Fee............................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES** CLASS B SHARES** CLASS C SHARES**
----------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Management Fees (Before Waiver)............. .50% .50% .50%
12b-1 Fees.................................. .10++ .50 .75++
Other Expenses.............................. .11 .11 .11
Total Fund Operating Expenses (Before
Waiver).................................... .71% 1.11% 1.36%
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
----- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment, assuming (1)
5% annual return and (2) redemption
at the end of each time period:
Class A.......................... $37 $52 $68 $116
Class B.......................... $61 $65 $71 $119
Class C.......................... $24 $43 $74 $164
You would pay the following expenses
on the same investment, assuming no
redemption:
Class A.......................... $37 $52 $68 $116
Class B.......................... $11 $35 $61 $119
Class C.......................... $14 $43 $74 $164
The above example with respect to Class A and Class B shares is based on restated
data for the Series' fiscal year ended August 31, 1994. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the entire fiscal year ended August
31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses, see
"How the Fund is Managed." "Other Expenses" includes operating expenses of the
Series, such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian fees.
<FN>
- ---------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
**Based on expenses incurred during the fiscal year ended August 31, 1994,
without taking into account the partial management fee waiver. At the current
level of management fee waiver (25%), Management Fees would be .375% for
Class A, Class B and Class C shares and Total Fund Operating Expenses would
be .585% for Class A shares, .985% for Class B shares and 1.295% (annualized)
for Class C shares. See "How the Fund is Managed--Manager-- Fee Waivers and
Subsidy."
+Pursuant to rules of the National Association of Securities Dealers, Inc., the
aggregate initial sales charges, deferred sales charges and asset-based sales
charges on shares of the Series may not exceed 6.25% of total gross sales,
subject to certain exclusions. This 6.25% limitation is imposed on each class
of the Series rather than on a per shareholder basis. Therefore, long-term
shareholders of the Series may pay more in total sales charges than the
economic equivalent of 6.25% of such shareholders' investment in such shares.
See "How the Fund is Managed--Distributor."
++Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares, respectively,
the Distributor has agreed to limit its distribution fees with respect to the
Class A and Class C shares of the Series to no more than .10 of 1% and .75 of
1% of the average daily net asset value of the Class A shares and Class C
shares, respectively, for the fiscal year ending August 31, 1995. Total Fund
Operating Expenses of the Class A and Class C shares without such limitations
would be .91% and 1.61%, respectively. See "How the Fund is
Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------ AUGUST 31,
1994 1993 1992 1991 1990
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.30
--------- --------- --------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+...................................... .61 .64 .67 .69 .41
Net realized and unrealized gain (loss) on investment
transactions............................................... (.75) .71 .51 .59 (.14)
--------- --------- --------- --------- -----------
Total from investment operations........................ (.14) 1.35 1.18 1.28 .27
--------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.61) (.64) (.67) (.69) (.41)
Distributions from net realized capital gains............... (.18) (.12) (.09) (.02) --
--------- --------- --------- --------- -----------
Total distributions..................................... (.79) (.76) (.76) (.71) (.41)
--------- --------- --------- --------- -----------
Net asset value, end of period.............................. $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
TOTAL RETURN++:............................................. (1.27)% 12.57% 11.35% 12.96% 2.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $14,774 $15,501 $ 11,941 $ 8,041 $ 3,616
Average net assets (000).................................... $15,334 $13,444 $ 9,759 $ 5,637 $ 1,902
Ratios to average net assets:+
Expenses, including distribution fees..................... .58% .61% .48% .29% .20%**
Expenses, excluding distribution fees..................... .48% .51% .38% .19% .10%**
Net investment income..................................... 5.42% 5.63% 6.14% 6.58% 6.79%**
Portfolio turnover.......................................... 34% 32% 38% 116% 87%
<FN>
- ---------------
*Commencement of offering of Class A shares.
**Annualized.
+Net of management and/or distribution fee waiver.
++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------
MARCH 4,
1988*
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988
--------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95 $ 10.00
--------- --------- --------- --------- --------- --------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+.................. .56 .59 .63 .65 .67 .73 .36
Net realized and unrealized gain (loss)
on investment transactions............. (.75) .71 .51 .59 (.14) .38 (.05)
--------- --------- --------- --------- --------- --------- ------------
Total from investment operations.... (.19) 1.30 1.14 1.24 .53 1.11 .31
--------- --------- --------- --------- --------- --------- ------------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.56) (.59) (.63) (.65) (.67) (.73) (.36)
Distributions from net realized capital
gains.................................. (.18) (.12) (.09) (.02) (.03) -- --
--------- --------- --------- --------- --------- --------- ------------
Total distributions................. (.74) (.71) (.72) (.67) (.70) (.73) (.36)
--------- --------- --------- --------- --------- --------- ------------
Net asset value, end of period.......... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95
--------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- ------------
TOTAL RETURN+++:........................ (1.67)% 12.12% 10.93% 12.52% 5.28% 11.48% 3.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $323,077 $351,878 $295,781 $244,322 $180,636 $125,650 $ 28,815
Average net assets (000)................ $343,941 $316,372 $269,318 $208,893 $155,162 $ 79,269 $ 19,806
Ratios to average net assets:+
Expenses, including distribution
fees................................. .98% 1.01% .88% .69% .50% .20% 0%
Expenses, excluding distribution
fees................................. .48% .51% .38% .19% .10% .14% 0%
Net investment income................. 5.02% 5.23% 5.74% 6.18% 6.50% 6.55% 6.27%**
Portfolio turnover...................... 34% 32% 38% 116% 87% 20% 96%
<FN>
- ---------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy and management and/or distribution fee waiver.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the period indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
------------
AUGUST 1,
1994*
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................... .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 capital
gains.................................. --
------
Total distributions................. (.04)
------
Net asset value, end of period.......... $10.81
------
------
TOTAL RETURN++:......................... 1.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 240
Average net assets (000)................ $ 11
Ratios to average net assets: #
Expenses, including distribution
fee.................................. 1.29%+**
Expenses, excluding distribution
fee.................................. .54%+**
Net investment income................. 5.06%+**
Portfolio turnover...................... 34%
<FN>
- ---------------
*Commencement of offering of Class C shares.
**Annualized.
+Net of management fee waiver.
++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total return is not annualized.
#Because of the event referred to in * and the timing of such, the ratios for
the Class C shares are not necessarily comparable to those of Class A or Class
B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW JERSEY SERIES (THE
SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM NEW JERSEY STATE INCOME TAX AND FEDERAL INCOME TAX
CONSISTENT WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE
SERIES MAY INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See
"Investment Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NEW JERSEY STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM NEW JERSEY STATE INCOME TAX AND FEDERAL
INCOME TAX (NEW JERSEY OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New Jersey law, as long as the Series qualifies as a
"qualified investment fund," dividends paid by the Series are exempt from New
Jersey income tax for resident individuals and New Jersey trusts and estates to
the extent such dividends are derived from interest payments on and gain
realized from the sale or exchange of New Jersey Obligations and other
obligations exempt from State and local taxation by the laws of New Jersey or
the United States. New Jersey Obligations could include general obligation bonds
of the State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL NEW JERSEY OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the New Jersey Obligations will, at the time
of purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase New Jersey Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular New Jersey Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW JERSEY OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of its total assets will be invested in
New Jersey Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation and the Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes, or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than New Jersey Obligations or may invest its assets so that
more than 20% of the income is subject to New Jersey or federal income taxes.
However, the Series must invest at least 80% of the aggregate principal amount
of all its investments (excluding cash, cash items and receivables, and
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indices related thereto that are related to the Series'
business of investing in securities (Related Financial Instruments)) in
obligations exempt from New Jersey personal income tax in order for its
distributions to remain exempt from such
9
<PAGE>
tax. The Series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
If the Series fails to qualify as a "qualified investment fund" under New
Jersey law, distributions to its shareholders will be subject to New Jersey
income tax. To meet the requirements for a "qualified investment fund," the
Series must have 100% of its investments in interest bearing obligations,
obligations issued at a discount, cash and cash items, including receivables,
and Related Financial Instruments.
THE SERIES IS AUTHORIZED TO ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE
RIGHT TO SELL SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE
PRICE ON A SPECIFIED DATE. The Series may acquire puts on securities in its
portfolio for the purpose of protecting the Series from a possible decline in
the market value of the security to which the put applies in the event of
interest rate fluctuations or, in the case of liquidity puts, for the purpose of
shortening the effective maturity of the underlying security. The aggregate
value of premiums paid to acquire puts held in the Series' portfolio (other than
liquidity puts) may not exceed 10% of the net asset value of the Series. The
acquisition of a put may involve an additional cost to the Series by payment of
a premium for the put, by payment of a higher purchase price for securities to
which the put is attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying securities. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW JERSEY OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
10
<PAGE>
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New Jersey Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON. THE SERIES
MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON TO THE EXTENT THEY
ARE RELATED FINANCIAL INSTRUMENTS FOR THE PURPOSE OF HEDGING ITS PORTFOLIO
SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET
INTEREST RATES AND HEDGING AGAINST INCREASES IN THE COST OF SECURITIES THE
SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS
THEREON BY THE SERIES INVOLVES ADDITIONAL TRANSACTION COSTS AND IS SUBJECT TO
VARIOUS RISKS AND DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE
DIRECTION OF THE MARKET (INCLUDING INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation
11
<PAGE>
margin requirements at a time when it might be disadvantageous to do so. The
inability to close futures positions also could have an adverse impact on the
ability of the Series to hedge effectively. There is also a risk of loss by the
Series of margin deposits in the event of bankruptcy of a broker with whom the
Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NEW JERSEY OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
NEW JERSEY OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF NEW JERSEY OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL
FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. The economic
slowdown which began in 1989 translated into revenue shortfalls and operating
deficits in fiscal 1989, 1990 and 1991. Surplus balances, which had peaked at
over $1.2 billion in fiscal 1988, fell to $116 million by fiscal year-end 1991.
The challenge to balance the fiscal year 1993 budget was made greater by the
1992 1% reduction in the State sales tax. The State's governor is keeping a
campaign promise to reduce the State income tax by 10% per year for the next
three years, beginning with the fiscal year 1995 budget. A balanced budget was
achieved by delaying a $1.1 billion contribution to the State employees' pension
fund. This move, on top of heavy borrowing by the previous administration, has
caused concern among some analysts that the State bond rating may be adversely
affected. The 1995 budget, which slightly reduces total spending to $15.3
billion, is already under serious pressure by a recent State Supreme Court
decision requiring New Jersey to correct a school funding disparity by 1996. If
either New Jersey or any of its local governmental entities is unable to meet
its financial obligations, the income derived by the Series, the ability to
preserve or realize appreciation of the Series' capital and the Series'
liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
12
<PAGE>
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets, net of management fee waivers, were .585%,
.985% and 1.295% (annualized) for the Series' Class A, Class B and Class C
shares, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee, net of waiver, of .375 of 1% of the Series' average net assets.
See "Fee Waivers and Subsidy" below and "Manager" in the Statement of Additional
Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS
13
<PAGE>
REIMBURSED BY PMF FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING
SUCH SERVICES. Under the Management Agreement, PMF continues to have
responsibility for all investment advisory services and supervises PIC's
performance of such services.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990 and prior thereto was employed as an analyst by Keystone
Group since 1986.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
During the fiscal year ended August 31, 1994, PMF voluntarily waived $449,095
(.13% of average net assets) of its management fee. PMF has agreed to waive 25%
of its management fee for the fiscal year ending August 31, 1995. The Series is
not required to reimburse PMF for such waiver. Thereafter, PMF may from time to
time waive its management fee or a portion thereof and subsidize certain
operating expenses of the Series. Fee waivers and expense subsidies will
increase the Series' yield and total return. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of
14
<PAGE>
.25 of 1%) may not exceed .30 of 1% of the average daily net assets of the Class
A shares. PMFD has agreed to limit its distribution-related fees payable under
the Class A Plan to .10 of 1% of the average daily net assets of the Class A
shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $15,334
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $94,600 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $1,767,326 under the Class B Plan and
received $1,719,706 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $447,600 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
15
<PAGE>
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
16
<PAGE>
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate total return" reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state
17
<PAGE>
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. The Fund will include performance data for
each class of shares of the Series in any advertisement or information including
performance data of the Series. Further performance information is contained in
the Series' annual and semi-annual reports to shareholders, which may be
obtained without charge. See "Shareholder Guide--Shareholder Services--Reports
to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
18
<PAGE>
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under New Jersey law, as long as the Series qualifies as a "qualified
investment fund," dividends paid by the Series are exempt from New Jersey income
tax for resident individuals and New Jersey trusts and estates to the extent
such dividends are derived from interest payments on, and gain realized from the
sale or exchange of, New Jersey Obligations and other obligations exempt from
state and local taxation by the laws of New Jersey and the United States.
Dividends paid to corporate shareholders will be subject to the New Jersey
Corporation Business tax or corporation income tax and may increase liability
under the federal alternative minimum tax.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series will elect to treat net
capital losses of approximately $2,941,904 incurred in the ten month period
ended August 31, 1994 as having been incurred in the following fiscal year.
Dividends paid by the Series with respect to each class of shares, to the extent
any distributions are paid, will be calculated in the same manner, at the same
time, on the same day and will be in the same amount except that each class will
bear its own distribution charges, generally resulting in lower dividends for
Class B and Class C shares. Distributions of net capital gains, if any, will be
paid in the same amount for each class of shares. See "How the Fund Values its
Shares."
19
<PAGE>
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
20
<PAGE>
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
21
<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
22
<PAGE>
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
23
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust
24
<PAGE>
or fiduciary, the signature(s) on the redemption request and on the
certificates, if any, or stock power must be guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of your Class B or Class C shares. You must notify the Fund's
Transfer Agent, either directly or through Prudential Securities or Prusec, at
the time the repurchase privilege is exercised that you are entitled to credit
for the contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon redemption. If the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, will not be allowed for
federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted
25
<PAGE>
from the redemption proceeds and reduce the amount paid to you. The CDSC will be
imposed on any redemption by you which reduces the current value of your Class B
or Class C shares to an amount which is lower than the amount of all payments by
you for shares during the preceding six years, in the case of Class B shares,
and one year, in the case of Class C shares. A CDSC will be applied on the
lesser of the original purchase price or the current value of the shares being
redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any contingent deferred sales charge will be paid to and retained by the
Distributor. See "How the Fund is Managed--Distributor" and "Waiver of the
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ ------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
26
<PAGE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
27
<PAGE>
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
28
<PAGE>
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A
SALES CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at
NAV without a sales charge. You may direct the Transfer Agent in writing
not less than 5 full business days prior to the record date to have
subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should
contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
to shareholders which provides for monthly or quarterly checks.
Withdrawals of Class B and Class C shares may be subject to a CDSC. See
"How to Sell Your Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and
semi-annual reports. The financial statements appearing in annual reports
are audited by independent accountants. In order to reduce duplicate
mailing and printing expenses, the Fund will provide one annual and
semi-annual shareholder report and annual prospectus per household. You
may request additional copies of such reports by calling (800) 225-1852 or
by writing to the Fund at One Seaport Plaza, New York, New York 10292. In
addition, monthly unaudited financial data is available upon request from
the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
One Seaport Plaza, New York, New York 10292, or by telephone, at (800)
225-1852 (toll-free) or, from outside the U.S.A., at (908) 417-7555
(collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
-COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
-INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
PAGE
----
FUND HIGHLIGHTS........................................................... 2
Risk Factors and Special Characteristics................................ 2
FUND EXPENSES............................................................. 4
FINANCIAL HIGHLIGHTS...................................................... 5
HOW THE FUND INVESTS...................................................... 8
Investment Objective and Policies....................................... 8
Other Investments and Policies.......................................... 12
Investment Restrictions................................................. 13
HOW THE FUND IS MANAGED................................................... 13
Manager................................................................. 13
Distributor............................................................. 14
Portfolio Transactions.................................................. 16
Custodian and Transfer and Dividend Disbursing Agent.................... 16
HOW THE FUND VALUES ITS SHARES............................................ 17
HOW THE FUND CALCULATES PERFORMANCE....................................... 17
TAXES, DIVIDENDS AND DISTRIBUTIONS........................................ 18
GENERAL INFORMATION....................................................... 20
Description of Shares................................................... 20
Additional Information.................................................. 21
SHAREHOLDER GUIDE......................................................... 21
How to Buy Shares of the Fund........................................... 21
Alternative Purchase Plan............................................... 22
How to Sell Your Shares................................................. 24
Conversion Feature--Class B Shares...................................... 27
How to Exchange Your Shares............................................. 28
Shareholder Services.................................................... 29
THE PRUDENTIAL MUTUAL FUND FAMILY......................................... A-1
-------------------------------------------
MF138A 642873R
Cusip Class A: 74435M-78-8
Nos.: Class B: 74435M-79-6
Class C: 74435M-53-1
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW JERSEY SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW JERSEY MONEY MARKET SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New Jersey Money Market Series)
(the "Series") is one of seventeen series of an open-end, management investment
company, or mutual fund. This Series is non-diversified and is designed to
provide the highest level of current income that is exempt from New Jersey State
and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term,
tax-exempt New Jersey State, municipal and local debt obligations and
obligations of other qualifying issuers. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the New
Jersey Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated December 30, 1994, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the New Jersey Money Market
Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from New Jersey State and federal income taxes
consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term New Jersey
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
New Jersey State and federal income taxes (New Jersey Obligations). There
can be no assurance that the Series' investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 13.
In seeking to achieve its investment objective, the Series will invest
more than 80% of the value of its total assets in New Jersey Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of New Jersey
Obligations. The Series is non-diversified so that more than 5% of its total
assets may be invested in the securities of one or more issuers. Investment
in a non-diversified portfolio involves more risk than investment in a
diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 9.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1994,
PMF served as manager or administrator to 68 investment companies, including
38 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' shares. The Series currently reimburses PMFD for expenses
related to the distribution of the Series' shares at an annual rate of up to
.125 of 1% of the average daily net assets of the Series. See "How the Fund
is Managed--Distributor" at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 23.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Fund through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at the net asset
value per share (NAV) next determined after receipt of your purchase order
by the Transfer Agent or Prudential Securities. See "How the Fund Values its
Shares" at page 13 and "Shareholder Guide-- How to Buy Shares of the Fund"
at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 14.
3
<PAGE>
FUND EXPENSES
(NEW JERSEY MONEY MARKET SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum Sales Load Imposed on Purchases................................. None
Maximum Sales Load Imposed on Reinvested Dividends...................... None
Deferred Sales Load..................................................... None
Redemption Fees......................................................... None
Exchange Fee............................................................ None
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Management Fees (Before Waiver)......................................... .500%
12b-1 Fees.............................................................. .125%
Other Expenses.......................................................... .178%
---------
Total Fund Operating Expenses (Before Waiver)........................... .803%
---------
---------
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ---------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period: ........ $8 $26 $45 $99
The above example is based on restated data for the Series' fiscal year ended August 31, 1994.
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various costs and
expenses that an investor in the Series will bear, whether directly or indirectly. For more
complete descriptions of the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian fees.
<FN>
----------------
*Based on expenses incurred during the fiscal year ended August 31, 1994,
without taking into account the management fee waiver. At the current level of
management fee waiver (25%), Management Fees and Total Fund Operating Expenses
would be .375% and .678%, respectively, of the Series' average net assets. See
"How the Fund is Managed--Manager-- Fee Waivers and Subsidy."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, DECEMBER 3, 1990*
------------------------------------- THROUGH
1994 1993 1992 AUGUST 31, 1991
--------- ---------- ---------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. 1.00 $1.00 $1.00 $1.00
Net investment income and net realized gains+......... .02 .02 .04 .03
Dividends and distributions to shareholders........... (.02) (.02) (.04) (.03)
--------- ---------- ---------- --------
Net asset value, end of period........................ $1.00 $1.00 $1.00 $1.00
--------- ---------- ---------- --------
--------- ---------- ---------- --------
TOTAL RETURN++:....................................... 1.90% 2.31% 3.48% 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $ 158,280 $ 163,087 $ 164,092 $ 117,460
Average net assets (000).............................. $ 169,123 $ 170,103 $ 155,915 $ 89,273
Ratios to average net assets+:
Expenses, including distribution fee.............. .68% .64% .32% .13%**
Expenses, excluding distribution fee.............. .55% .51% .19% .00%**
Net investment income............................. 1.87% 2.02% 3.33% 4.48%**
<FN>
--------------------------
* Commencement of investment operations.
** Annualized.
+ Net of expense subsidy and/or management fee waiver.
++ Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods of
less than a full year are not annualized.
</TABLE>
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING AND ITS "TAX-EQUIVALENT
YIELD." Tax-equivalent yield shows the taxable yield an investor would have to
earn from a fully taxable investment in order to equal the Series' tax-free
yield after taxes and is calculated by dividing the Series' current or effective
yield by the result of one minus the State tax rate times one minus the federal
tax rate. The following is an example of the yield calculations as of August 31,
1994:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $1.000477974
Value of hypothetical account at beginning of period........... 1.000000000
------------
Base period return............................................. $ .000477974
------------
------------
CURRENT YIELD (.000477974 x (365/7))........................... 2.49%+
EFFECTIVE ANNUAL YIELD, assuming weekly compounding............ 2.52%+
TAX-EQUIVALENT CURRENT YIELD (2.49% DIVIDED BY (1-43.62%)).... 4.42%+
<FN>
----------------
+After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax equivalent yield would have been 2.36%, 2.39% and 4.19%,
respectively. See "Manager" in the Statement of Additional Information.
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average maturity of the Series' portfolio on August 31, 1994 was
44 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW JERSEY MONEY MARKET
SERIES (THE SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO
PROVIDE THE HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM NEW JERSEY STATE
AND FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF
CAPITAL. THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN SHORT-TERM NEW JERSEY STATE, MUNICIPAL AND LOCAL GOVERNMENT
OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED
IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE
OPINION OF COUNSEL, FROM NEW JERSEY STATE AND FEDERAL INCOME TAXES (NEW JERSEY
OBLIGATIONS). SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THE STATEMENT OF
ADDITIONAL INFORMATION. THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
6
<PAGE>
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New Jersey law, as long as the Series qualifies as a
"qualified investment fund," dividends paid by the Series are exempt from New
Jersey income tax for resident individuals and New Jersey trusts and estates to
the extent such dividends are derived from interest payments on and gain
realized from the sale or exchange of New Jersey Obligations and other
obligations exempt from state and local taxation by the laws of New Jersey or
the United States. The New Jersey Obligations in which the Series may invest
include certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
certain variable and floating rate demand notes. See "Investment Objectives and
Policies--Tax-Exempt Securities--Tax-Exempt Notes" in the Statement of
Additional Information. The Series will maintain a dollar-weighted average
maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION. There is no limit on the amount of such
securities that the Series may purchase. Floating rate securities normally have
a rate of interest which is set as a specific percentage of a designated base
rate, such as the rate on Treasury Bonds or Bills or the prime rate at a major
commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL NEW JERSEY OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
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) OR (II) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY
THE INVESTMENT ADVISER UNDER THE SUPERVISION OF THE TRUSTEES. See "Description
of Tax-Exempt Security Ratings" in the Statement of Additional Information. The
investment adviser will monitor the credit quality of securities purchased for
the Series' portfolio and will limit its investments to those which present
minimal credit risks.
In selecting New Jersey Obligations for investment by the Series, the
investment adviser considers ratings assigned by major rating services,
information concerning the financial history and condition of the issuer and its
revenue and expense prospects and, in the case of revenue bonds, the financial
history and condition of the source of revenue to service the bonds. If a New
Jersey Obligation held by the Series is assigned a lower rating or ceases to be
rated, the investment adviser under the supervision of the Trustees will
promptly reassess whether that security presents minimal credit risks and
whether the Series should continue to hold the security in its portfolio. If a
portfolio security no longer presents minimal credit risks or is in default, the
Series will dispose of the security as soon as reasonably practicable unless the
Trustees determine that to do so is not in the best interests of the Series and
its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the Securities and Exchange Commission (SEC). See "How the
Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
7
<PAGE>
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW JERSEY OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of its total assets will be invested in
New Jersey Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or taxable cash equivalents such as
certificates of deposit, bankers' acceptances and time deposits or other
short-term taxable investments such as repurchase agreements, or high grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation. When, in the opinion of the investment adviser, abnormal market
conditions require a temporary defensive position, the Series may invest more
than 20% of the value of its assets in short-term debt securities other than New
Jersey Obligations or may invest its assets so that more than 20% of the income
is subject to New Jersey or federal income taxes. However, the Series must
invest at least 80% of the aggregate principal amount of all of 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 the Series' business of investing in
securities (Related Financial Instruments)) in obligations exempt from New
Jersey personal income tax in order for its distributions to remain exempt from
such tax.
If the Series fails to qualify as a "qualified investment fund" under New
Jersey law, distributions to its shareholders will be subject to New Jersey
income tax. To meet the requirements for a "qualified investment fund," the
Series must have 100% of its investments in interest bearing obligations,
obligations issued at a discount, cash and cash items, including receivables,
and Related Financial Instruments.
THE SERIES IS AUTHORIZED TO ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE
RIGHT TO SELL SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE
PRICE ON A SPECIFIED DATE. The Series may acquire puts on securities in its
portfolio for the purpose of protecting the Series from a possible decline in
the market value of the security to which the put applies in the event of
interest rate fluctuations or, in the case of liquidity puts, for the purpose of
shortening the effective maturity of the underlying security. The aggregate
value of premiums paid to acquire puts held in the Series' portfolio (other than
liquidity puts) may not exceed 10% of the net asset value of the Series. The
acquisition of a put may involve an additional cost to the Series by payment of
a premium for the put, by payment of a higher purchase price for securities to
which the put is attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying 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 (a) 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 (b) if only one
such rating organization assigned a rating, by that rating organization; 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 two
highest quality grades; or (3) the put is backed by a letter of credit or
similar financial guarantee issued by a person having securities outstanding
which are rated within the two highest quality grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase; the purchase price for such securities
includes interest accrued during the period between purchase and settlement,
and, therefore, no interest accrues to the economic benefit of the purchaser
during such period. In the case of purchases by the Series, the price that the
Series is required to pay on the settlement date may be in excess of the market
value of the municipal obligations on that date. While securities may be sold
prior to the settlement date, the Series intends to purchase these securities
with the purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the
8
<PAGE>
Series. If the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash and liquid, high-grade
debt obligations equal in value to its commitments for when-issued or delayed
delivery securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW JERSEY OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New Jersey Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN NEW JERSEY OBLIGATIONS AND BECAUSE
IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW JERSEY OBLIGATIONS, IT IS MORE
SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF NEW JERSEY OBLIGATIONS
THAN IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT CONCENTRATED IN
SUCH OBLIGATIONS TO THIS DEGREE. An investment in the Series therefore may
involve more risk than an investment in other types of money market funds. The
economic slowdown which began in 1989 translated into revenue shortfalls and
operating deficits in fiscal 1989, 1990 and 1991. Surplus balances, which had
peaked at over $1.2 billion in fiscal 1988, fell to $116 million by fiscal
year-end 1991. The challenge to balance the fiscal year 1993 budget was made
greater by the 1992 1% reduction in the State sales tax. The State's governor is
keeping a campaign promise to reduce the State income tax by 10% per year for
the next three years, beginning with the fiscal year 1995 budget. A balanced
budget was achieved by delaying a $1.1 billion contribution to the State
employees' pension fund. This move, on top of heavy borrowing by the previous
administration, has caused concern among some analysts that the State bond
rating may be adversely affected. The 1995 budget, which slightly reduces total
spending to $15.3 billion, is already under serious pressure by a recent State
Supreme Court decision requiring New Jersey to correct a school funding
disparity by 1996. If either New Jersey or any of its local governmental
entities is unable to meet its financial obligations, the income derived by the
Series, the ability to preserve or realize appreciation of the Series' capital
and the Series' liquidity could be adversely affected.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it might extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series
9
<PAGE>
will require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Series may incur a
loss. The Series participates in a joint repurchase account with other
investment companies managed by Prudential Mutual Fund Management, Inc. pursuant
to an order of the SEC. See "Investment Objectives and Policies-- Repurchase
Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may invest up to 10% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such restricted
securities under the supervision of the Trustees. See "Investment Objectives and
Policies--Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of its average net assets were .68%. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid a
management fee of .375 of 1% of the Series' average net assets after waiver. See
"Manager" in the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
10
<PAGE>
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
Commencing November 1, 1993, PMF agreed to waive 25% of its management fee.
During the fiscal year ended August 31, 1994, PMF voluntarily waived $211,404 of
its management fee. The Series is not required to reimburse PMF for such
management fee waiver. Thereafter, PMF may from time to time waive all or a
portion of its management fee and subsidize certain operating expenses of the
Series. Fee waivers and expense subsidies will increase the Series' yield. See
"Calculation of Yield" and "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD OR THE DISTRIBUTOR), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SERIES'
SHARES. IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities Incorporated
(Prudential Securities or PSI) and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, account servicing fees paid
to, or on account of, other broker-dealers or financial institutions (other than
national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses. The State of Texas requires that
shares of the Series may be sold in that state only by dealers or other
financial institutions which are registered there as broker-dealers.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the year ended August 31, 1994, the Series paid PMFD a distribution fee
equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
11
<PAGE>
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers and other persons which distribute shares of the Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
For the year ended August 31, 1994, PMFD incurred distribution expenses in the
aggregate of $211,404 with respect to the Series, all of which was recovered
through the distribution fee paid by the Series to PMFD. The Fund records all
payments made under the Plan as expenses in the calculation of its net
investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Purchases of portfolio securities are made from dealers, underwriters and
issuers; sales prior to maturity are made, for the most part, to dealers and
issuers. The Series does not normally incur any brokerage commission expense on
such transactions. The instruments purchased by the Series generally are 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. Securities purchased in underwritten offerings include a
fixed amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. When securities are purchased or sold
directly from or to an issuer, no commissions or discounts are paid. The policy
of the Series regarding purchases and sales of securities is that primary
consideration will be given to obtaining the most favorable price and efficient
execution of transactions.
12
<PAGE>
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days the New York Stock Exchange
is open for trading, except on days on which no orders to purchase, sell or
redeem shares have been received by the Series or days on which changes in the
value of the Series' portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
13
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income. The Series does not expect to have
long-term capital gains.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under New Jersey law, as long as the Series qualifies as a "qualified
investment fund," dividends paid by the Series are exempt from New Jersey income
tax for resident individuals and New Jersey trusts and estates to the extent
such dividends are
14
<PAGE>
derived from interest payments on, and gain realized from the sale or exchange
of, New Jersey Obligations and other obligations exempt from state and local
taxation by the laws of New Jersey and the United States. Dividends paid to
corporate shareholders will be subject to the New Jersey Corporation Business
tax or corporation income tax and may increase liability under the federal
alternative minimum tax.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE OR SUCH OTHER
DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS
AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential
Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of the year's dividends and distributions.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, all series of
the Fund, except for the Connecticut Money Market Series, the Massachusetts
Money Market Series, the New Jersey Money Market Series, the New York Income
Series and the New York Money Market Series, offer three classes, designated
Class A, Class B and Class C shares. The Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series offer only one class of shares. In accordance with
the Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
15
<PAGE>
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment is $1,000. The minimum subsequent investment is $100. All minimum
investment requirements are waived for the Command Account program (if the
Series is designated as your primary fund) and certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment if $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD, WITHOUT A SALES CHARGE, AT THE NAV PER SHARE
NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E., CHECK OR FEDERAL FUNDS
WIRED TO PMFS). See "How the Fund Values its Shares." When payment is received
by PMFS prior to 4:30 P.M., New York time,
16
<PAGE>
in proper form, a share purchase order will be entered at the price determined
as of 4:30 P.M., New York time, on that day, and dividends on the shares
purchased will begin on the business day following such investment. See "Taxes,
Dividends and Distributions."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued share certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT. Prudential Securities has advised the Fund that it has
instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of free
credit balances of $1,000 or more ($1.00 for IRA) (Eligible Credit Balances)
held in such client's account in shares of the Series (Autosweep). To effect the
automatic investment of Eligible Credit Balances representing the proceeds from
the sale of securities, Prudential Securities will enter orders for the purchase
of shares of the Series at the opening of business on the day following the
settlement of such securities transaction; to effect the automatic investment of
Eligible Credit Balances representing non-trade related credits, Prudential
Securities will enter orders for the purchase of shares of the Series at the
opening of business semi-monthly. All shares purchased pursuant to such
procedures will be issued at the NAV of such shares determined on the date the
order is entered and will receive the next dividend declared after such shares
are issued.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
17
<PAGE>
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed application form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, New Jersey Money Market Series, specifying on the wire the account
number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day and receive dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (New Jersey Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment for the purchase price of such shares and, in
the case of a new account, a completed application form. You should also submit
an IRS Form W-9. If PMFS receives an order to purchase shares of the Series and
payment in proper form prior to 4:30 P.M., New York time, the purchase order
will be effective that day and the investor will be entitled to dividends the
following business day. See "Taxes, Dividends and Distributions." Checks should
be made payable to Prudential Municipal Series Fund, New Jersey Money Market
Series. Certified checks are not necessary, but checks must be drawn on a bank
located in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares" below. The minimum initial investment by check is $1,000 and the minimum
subsequent investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the
18
<PAGE>
Series is placed (i) in the case of Available Cash resulting from the proceeds
of securities sales, on the settlement date of the securities sale, and (ii) in
the case of Available Cash resulting from non-trade related credits (I.E.,
receipt of dividends and interest payments, or a cash payment by the participant
into his or her Securities Account), on the business day after receipt by
Prudential Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-R- Account, including Visa purchases, cash advances and Visa Account
checks. Each Advantage Account Program Securities Account will be automatically
scanned for debits each business day as of the close of business on that day and
after application of any free credit cash balances in the account to such
debits, a sufficient number of shares of the Series (if selected as the primary
fund) and, if necessary, shares of other Advantage Account funds owned by the
Advantage Account Program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PMF
which are not primary Advantage Account funds will be redeemed as of that
business day to satisfy any remaining debits in the Securities Account. Shares
may not be purchased until all debits, overdrafts and other requirements in the
Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command-SM- Account program, an integrated financial services program of
Prudential Securities. Investors having a Command Account may select the Series
as their primary fund. Such investors will have free credit cash balances of
$1.00 or more in their Securities Account (Available Cash) (a component of the
Command Account program) automatically invested in shares of the Series as
described below. Specifically, an order to purchase shares of the Series is
placed (i) in the case of Available Cash resulting from the proceeds of
securities sales, on the settlement date of the securities sale, and (ii) in the
case of Available Cash resulting from non-trade related credits (I.E., receipt
of dividends and interest payments, or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate Command Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund. There are no minimum investment requirements for participants in the
Command Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Command program, such as those incurred by use of the Visa-R- Gold
Account, including Visa purchases, cash advances and Visa Account checks. Each
Command program Securities Account will be automatically scanned for debits
monthly for all Visa purchases incurred during that month and each business day
as of the close of business on that day for all cash advances and check charges
as incurred and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series and, if
necessary, shares of other Command funds owned by the Command program
participant which have not been selected as his or her primary fund or shares of
a participant's money market funds managed by PMF which are not primary Command
funds will be redeemed as of that business day to satisfy any remaining
19
<PAGE>
debits in the Securities Account. The single monthly debit for Visa purchases
will be made on the twenty-fifth day of each month, or the prior business day if
the twenty-fifth falls on a weekend or holiday. Margin loans will be utilized to
satisfy debits remaining after the liquidation of all shares of the Series in a
Securities Account, and shares may not be purchased until all debits, margin
loans and other requirements in the Securities Account are satisfied. Command
Account participants will not be entitled to dividends declared on the date of
redemption.
For information on participation in the Command Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
20
<PAGE>
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest higher dollar
unless the client notifies Prudential Securities to the contrary. The amount of
the redemption will be the lesser of (a) the total net asset value of the
Series' shares held in the client's Prudential Securities account or (b) the
deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client utilizing this automatic redemption procedure and who wishes
to pay for a securities transaction or satisfy any other debit balance in his or
her account other than through this automatic redemption procedure must do so
not later than the day of settlement for such securities transaction or the date
the debit balance is incurred. Prudential Securities clients who have elected to
utilize Autosweep will not be entitled to dividends declared on the date of
redemption.
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth above and the form returned to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time,
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services, Inc. at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
21
<PAGE>
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series' shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C
shares of other series of the Fund or Class C shares of the Prudential Mutual
Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
22
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should
contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic charge to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
for shareholders which provides for monthly or quarterly checks. See "How to
Sell Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may
open a single master account by filing an application form with the Transfer
Agent, Attention: Customer Service, P.O. Box 15005, New Brunswick, New
Jersey 08906, signed by personnel authorized to act for the institution.
Individual sub-accounts may be opened at the time the master account is
opened by listing them, or they may be added at a later date by written
advice or by filing forms supplied by the Fund. Procedures are available to
identify sub-accounts by name and number within the master account name. The
investment minimums set forth above are applicable to the aggregate amounts
invested by a group and not to the amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
23
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund. Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................ 2
Risk Factors and Special Characteristics..... 2
FUND EXPENSES.................................. 4
FINANCIAL HIGHLIGHTS........................... 5
CALCULATION OF YIELD........................... 6
HOW THE FUND INVESTS........................... 6
Investment Objective and Policies............ 6
Other Investments and Policies............... 9
Investment Restrictions...................... 10
HOW THE FUND IS MANAGED........................ 10
Manager...................................... 10
Distributor.................................. 11
Portfolio Transactions....................... 12
Custodian and Transfer and
Dividend Disbursing Agent................... 13
HOW THE FUND VALUES ITS SHARES................. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 14
GENERAL INFORMATION............................ 15
Description of Shares........................ 15
Additional Information....................... 16
SHAREHOLDER GUIDE.............................. 16
How to Buy Shares of the Fund................ 16
How to Sell Your Shares...................... 20
How to Exchange Your Shares.................. 22
Shareholder Services......................... 23
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
-------------------------------------------
MF147A 444126
</TABLE>
CUSIP No: 74435M-76-2
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL SERIES FUND
(NEW JERSEY MONEY MARKET SERIES)
- --------------------------------------
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Series) (the "Series")
is one of seventeen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from New York State, New York City and federal
income taxes consistent with the preservation of capital and, in conjunction
therewith, the Series may invest in debt securities with the potential for
capital gain. The net assets of the Series are invested in obligations within
the four highest ratings of either Moody's Investors Service or Standard &
Poor's Ratings Group or in unrated obligations which, in the opinion of the
Fund's investment adviser, are of comparable quality. There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is One Seaport
Plaza, New York, New York 10292, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the New
York Series that a prospective investor should know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated December 30, 1994,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the New York Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from New York State, New York City and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in New York State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto Rico,
the Virgin Islands and Guam, which pay income exempt, in the opinion of counsel,
from New York State, New York City and federal income taxes (New York
Obligations). There can be no assurance that the Series' investment objective
will be achieved. See "How the Fund Invests--Investment Objective and Policies"
at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in New York Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of New York Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide-- How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class
A shares (which are subject to lower ongoing
distribution-related expenses) approximately seven
years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(NEW YORK SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- -------------------- ---------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a 3% None None
percentage of offering price)...................
Maximum Sales Load or Deferred Sales Load Imposed
on Reinvested Dividends......................... None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever
is lower)....................................... None 5% during the first 1% on
year, decreasing by redemptions
1% annually to 1% in made within one
the fifth and sixth year of
years and 0% the purchase
seventh year*
Redemption Fees.................................. None None None
Exchange Fee..................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------ ------------------------ -------------------
<S> <C> <C> <C>
Management Fees.................................. .50% .50% .50%
12b-1 Fees....................................... .10++ .50 .75++
Other Expenses................................... .14 .14 .14
-- ---
---
Total Fund Operating Expenses.................... .74% 1.14% 1.39%
-- ---
-- ---
---
---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--------------------------------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return
and (2) redemption at the end of
each time period:
Class A...................... $37 $ 53 $ 70 $119
Class B...................... $62 $ 66 $ 73 $122
Class C...................... $24 $ 44 $ 76 $167
You would pay the following
expenses on the same investment,
assuming no redemption:
Class A...................... $37 $ 53 $ 70 $119
Class B...................... $12 $ 36 $ 63 $122
Class C...................... $14 $ 44 $ 76 $167
The above example with respect to Class A and Class B shares is based on
data for the Series' fiscal year ended August 31, 1994. The above
example with respect to Class C shares is based on expenses expected to
have been incurred if Class C shares had been in existence during the
entire fiscal year ended August 31, 1994. THE EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees'
and professional fees, registration fees, reports to shareholders and
transfer agency and custodian fees.
<FN>
---------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
+Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1995. Total Fund Operating Expenses of the Class A and Class C
shares without such limitations would be .94% and 1.64%, respectively. See
"How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------
JANUARY 22,
YEAR ENDED AUGUST 31, 1990* THROUGH
------------------------------------ AUGUST 31,
1994 1993 1992 1991 1990
---------- ------- ------ ------ -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $12.54 $11.75 $11.08 $10.62 $10.81
---------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------------
Net investment income......... .67 .70 .71 .72 .42
Net realized and unrealized
gain (loss) on investment
transactions................. (.83) .79 .67 .46 (.19)
---------- ------- ------ ------ ------
Total from investment
operations................. (.16) 1.49 1.38 1.18 .23
---------- ------- ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------------
Dividends from net investment
income....................... (.67) (.70) (.71) (.72) (.42)
---------- ------- ------ ------ ------
Net asset value, end of
period....................... $11.71 $12.54 $11.75 $11.08 $10.62
---------- ------- ------ ------ ------
---------- ------- ------ ------ ------
TOTAL RETURN+:................ (1.38)% 13.06% 12.73% 11.49% 2.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $13,661 $11,821 $6,057 $2,729 $1,174
Average net assets (000)...... $13,454 $ 8,755 $4,024 $1,579 $ 588
Ratios to average net assets:
Expenses, including
distribution fee........... .74% .74% .74% .71% .78%**
Expenses, excluding
distribution fee........... .64% .64% .64% .61% .68%**
Net investment income....... 5.46% 5.78% 6.19% 6.61% 6.41%**
Portfolio turnover............ 49% 44% 45% 78% 127%
<FN>
---------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends.
Total returns for periods of less than a full year are not annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------------------
SEPTEMBER 13,
1984*
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------------------------ AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $12.54 $11.75 $11.08 $10.62 $10.88 $10.59 $10.79 $12.07 $10.88 $10.00
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------------
Net investment
income........... .62 .65 .66 .67 .65 .65 .71 .72 .83 .76+
Net realized and
unrealized gain
(loss) on
investment
transactions..... (.83) .79 .67 .46 (.26) .29 (.20) (.81) 1.30 .88
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
Total from
investment
operations..... (.21) 1.44 1.33 1.13 .39 .94 .51 (.09) 2.13 1.64
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
LESS DISTRIBUTIONS
- ------------------
Dividends from net
investment
income........... (.62) (.65) (.66) (.67) (.65) (.65) (.71) (.72) (.83) (.76)
Distributions from
net realized
gains............ -- -- -- -- -- -- -- (.47) (.11) --
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
Total
distributions... (.62) (.65) (.66) (.67) (.65) (.65) (.71) (1.19) (.94) (.76)
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
Net asset value,
end of period.... $11.71 $12.54 $11.75 $11.08 $10.62 $10.88 $10.59 $10.79 $12.07 $10.88
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
---------- -------- -------- -------- -------- -------- -------- -------- -------- ---------------
TOTAL
RETURN+++:....... (1.77)% 12.61% 12.32% 10.96% 3.73% 9.33% 4.93% (0.89)% 20.53% 16.82%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)..... $331,982 $358,607 $316,472 $293,942 $313,606 $340,728 $307,458 $313,663 $246,302 $118,107
Average net assets
(000)............ $350,564 $330,823 $303,016 $295,285 $332,580 $353,225 $298,290 $299,963 $191,966 $66,800
Ratios to average
net assets:
Expenses,
including
distribution
fee............ 1.14% 1.14% 1.14% 1.11% 1.17% 1.05% 1.10% 1.06% 1.08% 1.21%+**
Expenses,
excluding
distribution
fee............ .64% .64% .64% .61% .67% .64% .62% .57% .60% .73%+**
Net investment
income......... 5.06% 5.38% 5.79% 6.21% 6.10% 5.77% 6.72% 6.21% 6.90% 7.47%+**
Portfolio
turnover......... 49% 44% 45% 78% 127% 96% 91% 246% 131% 65%
<FN>
-----------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated
period)
(Class C Shares)
The following financial highlights have been audited by Deloitte &
Touche LLP, independent accountants, whose report thereon was unqualified.
This information should be read in conjunction with the financial statements
and the notes thereto, which appear in the Statement of Additional
Information. The following financial highlights contain selected data for a
Class C share of beneficial interest outstanding, total return, ratios to
average net assets and other supplemental data for the period indicated.
This information is based on data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-------------
AUGUST 1,
1994* 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 DISTRIBUTIONS
- -------------------------
Dividends from net
investment income....... (.04)
-------------
Net asset value, end of
period.................. $11.71
-------------
-------------
TOTAL RETURN+:........... 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 fee...... 1.62%**
Expenses, excluding
distribution fee...... .87%**
Net investment
income................ 5.17%**
Portfolio turnover....... 49%
<FN>
-----------------
*Commencement of offering of Class C shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends.
Total return is not annualized.
#Because of the event referred to in * and the timing of such, the ratios
for the Class C shares are not necessarily comparable to that of Class A or
B shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW YORK SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM NEW YORK STATE, NEW YORK CITY AND FEDERAL INCOME TAXES CONSISTENT
WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY
INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment
Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NEW YORK STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM NEW YORK STATE, NEW YORK CITY AND
FEDERAL INCOME TAXES (NEW YORK OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE
SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New York law, dividends paid by the Series are exempt from
New York State and New York City income tax for resident individuals to the
extent they are derived from interest payments on New York Obligations. New York
Obligations could include general obligation bonds of the State, counties,
cities, towns, etc., revenue bonds of utility systems, highways, bridges, port
and airport facilities, colleges, hospitals, etc., and industrial development
and pollution control bonds. The Series will invest in long-term obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the
8
<PAGE>
value of an index. Changes in the interest rate on the other security or index
inversely affect the residual interest rate paid on the inverse floater, with
the result that the inverse floater's price will be considerably more volatile
than that of a fixed rate bond. The market for inverse floaters is relatively
new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL NEW YORK OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the New York Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase New York Obligations which,
in the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular New York Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW YORK OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from New York
State, New York City and federal income taxes or the Series will have at least
80% of its total assets invested in New York Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not New York City or New York State, taxation and the Series
may invest in tax-free cash equivalents, such as floating rate demand notes,
tax-exempt commercial paper and general obligation and revenue notes, or in
taxable cash equivalents, such as certificates of deposit, bankers acceptances
and time deposits or other short-term taxable investments such as repurchase
agreements. When, in the opinion of the investment adviser, abnormal market
conditions require a temporary defensive position, the Series may invest more
than 20% of the value of its assets in debt securities other than New York
Obligations or may invest its assets so that more than 20% of the income is
subject to New York State, New York City or federal income taxes. The Series
will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a
9
<PAGE>
possible decline in the market value of the security to which the put applies in
the event of interest rate fluctuations or, in the case of liquidity puts, for
the purpose of shortening the effective maturity of the underlying security. The
aggregate value of premiums paid to acquire puts held in the Series' portfolio
(other than liquidity puts) may not exceed 10% of the net asset value of the
Series. The acquisition of a put may involve an additional cost to the Series by
payment of a premium for the put, by payment of a higher purchase price for
securities to which the put is attached or through a lower effective interest
rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW YORK OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New York Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO
10
<PAGE>
PURCHASE. THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE
SERIES INVOLVES ADDITIONAL TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND
DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE
MARKET (INCLUDING INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
11
<PAGE>
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NEW YORK OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW
YORK OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS
OF NEW YORK OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT IS
NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. New York's budgets for
fiscal years 1992-1993 and 1993-1994 have produced cash surpluses for the first
time since fiscal year 1987-1988. The 1994-1995 budget is projected to result in
a substantial deficit, perhaps as large as $5 billion. There can be no
assurances that the State will not face substantial potential budget gaps in
future years resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the spending required to
maintain State programs at current levels. To address any potential budgetary
imbalance, the State may need to take significant actions to align recurring
receipts and disbursements in future fiscal years. If either New York State or
any of its local governmental entities is unable to meet its financial
obligations, the income derived by the Series, the ability to preserve or
realize appreciation of the Series' capital and the Series' liquidity could be
adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
12
<PAGE>
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average daily net assets were .74%, 1.14% and 1.62% (annualized)
for the Series' Class A, Class B and Class C shares, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
13
<PAGE>
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $13,454
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $166,000 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net
14
<PAGE>
assets of the Class C shares for the fiscal year ending August 31, 1995.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $2,019,500 under the Class B Plan and
received $1,752,818 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $336,000 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year
15
<PAGE>
period, PSI has complied with the terms of the agreement, no prosecution will be
instituted by the United States for the offenses charged in the complaint. If on
the other hand, during the course of the three year period, PSI violates the
terms of the agreement, the U.S. Attorney can then elect to pursue these
charges. Under the terms of the agreement, PSI agreed, among other things, to
pay an additional $330,000,000 into the fund established by the SEC to pay
restitution to investors who purchased certain PSI limited partnership
interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P .O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P .O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
16
<PAGE>
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals, and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
17
<PAGE>
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) exchanges of Class B
or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
18
<PAGE>
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under New York law, dividends paid by the Series are exempt from New York
State and New York City income taxes for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% at the distributions of the Series are comprised of tax exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTION
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1994, of approximately
$15,700. 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 will elect to treat net capital losses of approximately $531,600
incurred in the ten month period ended August 31, 1994 as having been incurred
in the following fiscal year. Dividends paid by the Series with respect to each
class of shares, to the extent any dividends are paid, will be calculated in the
same manner, at the same time, on the same day and will be in the same amount
except that each class will bear its own distribution charges, generally
resulting in lower dividends for Class B and Class C shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P .O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
19
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall be subject to any personal liability for
the acts or obligations of the Fund and that every written obligation, contract,
instrument or undertaking made by the Fund shall contain a provision to the
effect that the shareholders are not individually bound thereunder.
20
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
for Class A and Class B shares is $1,000 per class and $5,000 for Class C
shares. The minimum subsequent investment is $100 for all classes. All minimum
investment requirements are waived for certain employee savings plans. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
21
<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
22
<PAGE>
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such
23
<PAGE>
person's employer and (e) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 90 days of the commencement of the
financial adviser's employment at Prudential Securities, (ii) the purchase is
made with proceeds of a redemption of shares of any open-end, non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) on which no
deferred sales load, fee or other charge was imposed on redemption and (iii) the
financial adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P .O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such
24
<PAGE>
Exchange is restricted, (c) when an emergency exists as a result of which
disposal by the Series of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Series fairly to determine the value
of its net assets, or (d) during any other period when the SEC, by order, so
permits; provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit or the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
25
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- -------------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
26
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
27
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P .M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P .O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
28
<PAGE>
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not less
than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including
a Command Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec representative or
the Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 20
Description of Shares......................... 20
Additional Information........................ 21
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 27
How to Exchange Your Shares................... 28
Shareholder Services.......................... 29
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- ------------------------------------------------
MF 122A 44404EO
Class A: 74435M-74-7
CUSIP Nos.: Class B: 74435M-75-4
Class C: 74435M-52-3
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW YORK SERIES)
- --------------------------------------
[Logo]
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
(NEW YORK INCOME SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Income Series) (the
"Series") is one of eighteen series of an open-end, management investment
company, or mutual fund. This Series is non-diversified and seeks to provide the
maximum amount of income that is exempt from New York State, New York City and
federal income taxes consistent with the preservation of capital. The Series
will invest primarily in investment grade municipal obligations but may also
invest a portion of its assets in lower-quality municipal obligations or in
non-rated securities which, in the opinion of the Fund's investment adviser, are
of comparable quality. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the New
York Income Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
eighteen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the New York Income Series is offered through this
Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from New York State, New York City and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in New York State, New York City, municipal and local government
obligations and obligations of other qualifying issuers, such as issuers located
in Puerto Rico, the Virgin Islands and Guam, which pay income exempt, in the
opinion of counsel, from New York State, New York City and federal income taxes
(New York Obligations). There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies" at page 5.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in New York Obligations. This degree
of investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of New York Obligations. The Series may invest up to
30% of its total assets in high yield securities, commonly known as "junk
bonds," which may be considered speculative and are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations as
well as price volatility. The Series is non-diversified in that more than 5% of
its total assets may be invested in the securities of one or more issuers.
Investing in a non-diversified portfolio involves greater risk than investment
in a diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 9. To hedge against changes in
interest rates, the Series may also purchase put options and engage in
transactions involving derivatives, including financial futures contracts and
options thereon. See "How the Fund Invests--Investment Objective and
Policies--Futures Contracts and Options Thereon" at page 8.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed-- Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' shares and is paid an annual distribution and service fee which is
currently being charged at the rate of .10 of 1% of the average daily net assets
of the Series' shares, although currently the entire fee is waived. See "How the
Fund is Managed--Distributor" at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent investment is
$100. There is no minimum investment requirement for certain employee savings
plans. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder
Guide--Continuous Offering of Shares" at page 17 and "Shareholder
Guide--Shareholder Services" at page 21.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Fund through its transfer agent, Prudential Mutual
Fund Services, Inc. (PMFS or the Transfer Agent), at the net asset value per
share (NAV) next determined after receipt of your purchase order by the Transfer
Agent or Prudential Securities plus a sales charge which is imposed at the time
of purchase. See "How the Fund Values its Shares" at page 13.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers one class of shares which may be purchased at the next
determined NAV plus a sales charge which is imposed at the time of purchase.
- Shares are sold with an initial sales charge of up to 3% of the
amount invested.
See "Shareholder Guide--Continuous Offering of Shares" at page 17.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. See
"Shareholder Guide--How to Sell Your Shares" at page 19.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 14.
3
<PAGE>
FUND EXPENSES
(NEW YORK INCOME SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
3%
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)....................
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends.......................... None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)............................. None
Redemption Fees..................... None
Exchange Fee........................ None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
<S> <C>
Management Fees (After Waiver)...... 0%
12b-1 Fees (After Waiver)........... 0%
Other Expenses (After Subsidy)...... 0%
------
Total Fund Operating Expenses (After
Waiver and Subsidy)................ 0%
------
------
</TABLE>
<TABLE>
<CAPTION>
1 3
EXAMPLE YEAR YEARS
---------------------------------------- ----- ------
<S> <C> <C>
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period:............... $30 $30
The above example is based on estimated data for the
Series' fiscal year ending August 31, 1995. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN THOSE SHOWN.
The purpose of this table is to assist an investor in
understanding the various costs and expenses that an
investor in the New York Income Series will bear,
whether directly or indirectly. For more complete
descriptions of the various costs and expenses, see "How
the Fund is Managed." "Other Expenses" includes
operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to
shareholders and transfer agency and custodian fees.
PMF has agreed to waive its management fee and subsidize
100% of other expenses and PMFD has agreed to waive its
distribution fee until August 31, 1995.
</TABLE>
------------------
*Before the waiver of management and distribution fees and the subsidy of
other expenses, Management Fees, 12b-1 Fees, Other Expenses and Total
Fund Operating Expenses would be .50%, .10%, .27% and .87% of the Series'
average net assets. See "Management of the Fund--Manager--Fee Waivers and
Subsidy."
4
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF EIGHTEEN SEPARATE SERIES. EACH
SERIES OF THE FUND IS MANAGED INDEPENDENTLY. THE NEW YORK INCOME SERIES (THE
SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM NEW YORK STATE, NEW YORK CITY AND FEDERAL INCOME
TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NEW YORK STATE, NEW YORK CITY, MUNICIPAL
AND LOCAL GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS,
SUCH AS ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY
INCOME EXEMPT, IN THE OPINION OF COUNSEL, FROM NEW YORK STATE, NEW YORK CITY AND
FEDERAL INCOME TAXES (NEW YORK OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE
SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE. Interest on certain
municipal obligations may be a preference item for purposes of the federal
alternative minimum tax. The Series may invest without limit in municipal
obligations that are "private activity bonds" (as defined in the Internal
Revenue Code) the interest on which would be a preference item for purposes of
the federal alternative minimum tax. See "Taxes, Dividends and Distributions."
Under New York law, dividends paid by the Series are exempt from New York State
and New York City income tax for resident individuals to the extent they are
derived from interest payments on New York Obligations. New York Obligations may
include general obligation bonds of the State, counties, cities, towns, etc.,
revenue bonds of utility systems, highways, bridges, port and airport
facilities, colleges, hospitals, etc., and industrial development and pollution
control bonds. The Series will invest in long-term New York Obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-30 years. The Series may also invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
5
<PAGE>
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN NEW YORK
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S INVESTORS SERVICE (MOODY'S)
(CURRENTLY AAA, AA, A, BAA FOR BONDS, MIG 1, MIG 2, MIG 3, MIG 4 FOR NOTES AND
P-1 FOR COMMERCIAL PAPER) OR STANDARD & POOR'S RATINGS GROUP (S&P) (CURRENTLY
AAA, AA, A, BBB FOR BONDS, SP-1, SP-2 FOR NOTES AND A-1 FOR COMMERCIAL PAPER)
OR, IF UNRATED, WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT
ADVISER, COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN 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. Securities rated Baa by Moody's are described by Moody's as
being investment grade but are also characterized as having speculative
characteristics. Securities rated below Baa by Moody's and below BBB by S&P are
considered speculative. See "Description of Security Ratings" in the Appendix.
Such lower rated high yield securities are commonly referred to as "junk bonds."
Such securities generally offer a higher current yield than those in the higher
rating categories but also involve greater price volatility and risk of loss of
principal and income. See "Risk Factors Relating to Investing in High Yield
Municipal Obligations" below. Many issuers of lower-quality bonds choose not to
have their obligations rated and the Series may invest without further limit in
such unrated securities. Investors should carefully consider the relative risks
associated with investments in securities which carry lower ratings and in
comparable non-rated securities. As a general matter, bond prices and the
Series' net asset value will vary inversely with interest rate fluctuations. The
Series may also invest up to 5% of its total assets in New York Obligations that
are in default in the payment of principal or interest. See "Investment
Objectives and Policies--Risks of Investing in Defaulted Securities" in the
Statement of Additional Information.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW YORK OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from New York
State, New York City and federal income taxes or the Series will have at least
80% of its total assets invested in New York Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than New York Obligations or may invest
its assets so that more than 20% of the income is subject to New York State or
federal income taxes.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The
6
<PAGE>
acquisition of a put may involve an additional cost to the Series, by payment of
a premium for the put, by payment of a higher purchase price for securities to
which the put is attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW YORK OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New York Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser considers both credit risk and market risk in making
investment decisions for the Series. Under circumstances where the Series owns
the majority of an issue, such market and credit risks may be greater. Investors
should carefully consider the relative risks of investing in high yield
municipal obligations and understand that such securities are not generally
meant for short-term investing.
7
<PAGE>
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE OR AN AGREED AMOUNT OF A SPECIFIC FIXED-INCOME SECURITY. No
physical delivery of the underlying securities is made. The Series will engage
in transactions in only those futures contracts and options thereon that are
traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON, IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have
8
<PAGE>
an adverse impact on the ability of the Series to hedge effectively. There is
also a risk of loss by the Series of margin deposits in the event of bankruptcy
of a broker with whom the Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge has moved in
a favorable direction, the advantage to the Series would be partially offset by
the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NEW YORK OBLIGATIONS, AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
NEW YORK OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN NEW YORK OBLIGATIONS TO THIS DEGREE. New York's budgets
for fiscal years 1992-1993 and 1993-1994 have produced cash surpluses for the
first time since fiscal year 1987-1988. The 1994-1995 budget is projected to
result in a substantial deficit, perhaps as large as $5 billion. There can be no
assurances that the State will not face substantial potential budget gaps in
future years resulting from a significant disparity between tax revenues
projected from a lower recurring receipts base and the spending required to
maintain State programs at current levels. To address any potential budgetary
imbalance, the State may need to take significant actions to align recurring
receipts and disbursements in future fiscal years. If either New York State or
any of its local governmental entities is unable to meet its financial
obligations, the income derived by the Series, the ability to preserve or
realize appreciation of the Series' capital and the Series' liquidity could be
adversely affected.
THE SERIES IS "NON-DIVERSIFIED" SO THAT MORE THAN 5% OF ITS TOTAL ASSETS MAY
BE INVESTED IN THE SECURITIES OF ONE OR MORE ISSUERS. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
9
<PAGE>
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE
FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY
BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
The Series is responsible for the payment of certain fees and expenses
including, among others, the following: (i) management and distribution fees;
(ii) the fees of unaffiliated Trustees; (iii) the fees of the Fund's Custodian
and Transfer and Dividend Disbursing Agent; (iv) the fees of the Fund's legal
counsel and independent accountants; (v) brokerage commissions incurred in
connection with portfolio transactions; (vi) all taxes and charges of
governmental agencies; (vii) the reimbursement of organizational expenses and
(viii) expenses related to shareholder communications.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
10
<PAGE>
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since its inception and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS AND SUBSIDY
PMF HAS AGREED TO WAIVE ITS MANAGEMENT FEE AND TO SUBSIDIZE OPERATING EXPENSES
OF THE SERIES UNTIL [AUGUST 31, 1995] AND PMFD HAS AGREED TO WAIVE DISTRIBUTION
FEES UNTIL SUCH DATE. The Series is not required to reimburse PMF for such
management fee waiver or expense subsidy. Thereafter, PMF may from time to time
agree to waive its management fee or a portion thereof and subsidize certain
operating expenses of the Series. Fee waivers and expense subsidies will
increase the Series' yield and total return. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SHARES OF THE SERIES. IT IS A
WHOLLY-OWNED SUBSIDIARY OF PMF.
UNDER A PLAN OF DISTRIBUTION (THE PLAN) ADOPTED BY THE FUND UNDER RULE 12B-1
UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE DISTRIBUTION
AGREEMENT), PMFD (THE DISTRIBUTOR) INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), affiliated
broker-dealers, commissions and account servicing fees paid to, or on account
of, other broker-dealers or financial institutions (other than national banks)
which have entered into agreements with the Distributor, advertising expenses,
the cost of printing and mailing prospectuses to potential investors and
indirect and overhead costs of Prudential Securities and Prusec associated with
the sale of Series shares, including lease, utility, communications and sales
promotion expenses. The State of Texas requires that shares of the Series may be
sold in that state only by dealers or other financial institutions which are
registered there as broker-dealers.
UNDER THE PLAN, THE SERIES COMPENSATES PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES AT AN ANNUAL RATE OF UP TO .30 OF 1% OF THE SERIES' AVERAGE DAILY NET
ASSETS. The Plan provides that (i) up to .25 of 1% of the average daily net
assets of the Series' shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (ii) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1% of the
average daily net assets of the Series' shares. It is expected that proceeds
from the distribution fee will be used primarily to pay account servicing fees
to financial advisers. PMFD has advised the Series that distribution expenses
under the Plan will not exceed .10 of 1% of the Series' average daily net assets
for the fiscal year ending August 31, 1995, although currently PMFD is waiving
its fee.
The Series records all payments made under the Plan as expenses in the
calculation of net investment income.
The Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and
11
<PAGE>
who have no direct or indirect financial interest in the operation of the Plan
or any agreement related to the Plan (the Rule 12b-1 Trustees), vote annually to
continue the Plan. The Plan may be terminated with respect to the Series at any
time by vote of a majority of the Rule 12b-1 Trustees or of a majority of the
outstanding shares of the Series. The Series will not be obligated to pay
expenses incurred under the Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers and other persons which distribute shares of the Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1825.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
12
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts, 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NAV OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK
TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. Securities may also be valued based on
values provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. THESE FIGURES
ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The "yield" refers to the income generated by an investment in the
Series over a one-month or 30-day period. This income is then "annualized"; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The "tax
equivalent yield" is calculated similarly to the "yield," except that the yield
is increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax equivalent to the Series. The "total return"
shows how much an investment in the Series would have increased (decreased) over
a specified period of time (I.E., one, five or ten years or since inception of
the Fund) assuming that all distributions and dividends by the Series were
reinvested on the reinvestment dates during the period and less all recurring
fees. The "aggregate" total return reflects actual performance over a stated
period of time. "Average annual" total return is a hypothetical rate of return
that, if achieved annually, would have produced the same aggregate total return
if performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information is contained in the
13
<PAGE>
Series' annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide-- Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES WILL ELECT TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, IF SO
QUALIFIED, THE SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET
INVESTMENT INCOME AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. TO THE EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE
INVESTMENT INCOME AND CAPITAL GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Capital gain or loss may also
arise upon the sale of municipal securities. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "market to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional information.
TAXATION OF SHAREHOLDERS
In general, for federal income tax purposes the character of tax-exempt
interest distributed by the Series will flow through as tax-exempt interest to
its shareholders provided that 50% or more of the value of its assets at the end
of each quarter of its taxable year is invested in state, municipal and other
obligations, the interest on which is excluded from gross income for federal
income tax purposes. During normal market conditions, at least 80% of the
Series' total assets will be invested in such obligations. See "How the Fund
Invests--Investment Objective and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for corporate shareholders currently is the
same as the maximum tax rate for ordinary income. The maximum long-term capital
gains rate for individuals is 28%.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition,
14
<PAGE>
any short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder or shares that are held for six months or
less.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax reference incurred by the Series will be attributed to
the Series' shareholders, although some portion of such items could be allocated
to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisors with respect to this potential preference item.
Under New York law, dividends paid by the Series are exempt from New York
State and New York City income tax for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of dividend, capital gain and redemption proceeds on
the accounts of those shareholders who fail to furnish their tax identification
numbers on IRS Form W-9 (or IRS form W-8 in the case of certain foreign
shareholders) with the required certifications regarding the shareholder's
status under the federal income tax law. Withholding also is required on taxable
dividends and capital gain distributions made by the Series unless it is
reasonably expected that at least 95% of the distributions of the Series are
comprised of tax-exempt dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUES OF SERIES SHARES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. The Fund will
notify each shareholder after the close of the Fund's taxable year both of the
per share amount and the taxable status of that year's dividends and
distributions. If you hold shares through Prudential Securities, you should
contact your financial adviser to elect to receive dividends and distributions
in cash.
Any taxable dividends or distributions of net capital gains paid shortly after
a purchase by an investor will have the effect of reducing the per share net
asset value by the per share amount of the dividends or distributions. Such
dividends or distributions, although in effect a return of invested principal,
are subject to federal income taxes. Accordingly, prior to purchasing shares of
the Series, an investor should carefully consider the impact of taxable
dividends and capital gains distributions which are expected to be or have been
announced.
15
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Series, New York Income Series, New York Money
Market Series, North Carolina Series, Ohio Series and Pennsylvania Series. The
Fund has received an order from the SEC permitting the issuance and sale of
multiple classes of shares within each series. All series of the Fund, except
for the Connecticut Money Market Series, the Massachusetts Money Market Series,
the New Jersey Money Market Series, the New York Income Series and the New York
Money Market Series, offer three classes, designated Class A, Class B and Class
C shares. The Series is authorized to issue two classes of shares, Class A and
Class B. Currently the Series is offering only one class of shares, which will
be redesignated Class A shares if the Alternative Purchase Plan is implemented
with respect to the Series. In accordance with the Fund's Declaration of Trust,
the Trustees may authorize the creation of additional series and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, except as noted above, and
each class bears the expenses related to the distribution of its shares. There
are no conversion, premptive or other subscription rights. In the event of
liquidation, each share of beneficial interest of each series is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
16
<PAGE>
SHAREHOLDER GUIDE
INITIAL OFFERING OF SHARES
DURING A SUBSCRIPTION PERIOD (THE SUBSCRIPTION PERIOD) CURRENTLY EXPECTED TO
END ON OR ABOUT , 199 , PRUDENTIAL SECURITIES AND PMFD, AS SUBSCRIPTION
AGENTS, WILL SOLICIT SUBSCRIPTIONS FOR SHARES OF THE SERIES. SHARES WILL BE
OFFERED TO INVESTORS AT A MAXIMUM OFFERING PRICE OF $ PER SHARE, WHICH IS
INCLUSIVE OF THE MAXIMUM SALES CHARGE OF 3.0% (3.09% OF THE AMOUNT INVESTED).
INVESTORS THAT PLACE ORDERS FOR SHARES OF $100,000 OR MORE WILL PAY A REDUCED
SALES CHARGE. SEE "CONTINUOUS OFFERING OF SHARES."
EACH INVESTOR'S DEALER WILL NOTIFY SUCH INVESTOR OF THE END OF THE
SUBSCRIPTION PERIOD AND PAYMENT WILL BE DUE WITHIN FIVE DAYS THEREAFTER. If any
orders received during the Subscription Period are accompanied by payment, such
payment will be returned unless instructions have been received authorizing
investment in a money market fund. All such moneys received and invested in a
money market fund, including any dividends received on these funds, will be
automatically invested in the Series on the closing date without any further
action by the investor. Shareholders who purchase their shares during the
Subscription Period will not receive share certificates. The minimum initial
investment during the Subscription Period is $1,000, except that there are no
minimum investment requirements for certain retirement and employee savings
plans or custodial accounts for the benefit of minors.
Subscribers for shares will not have any of the rights of a shareholder of the
Fund until the shares subscribed for have been paid for and their issuance has
been reflected in the books of the Fund. The Fund reserves the right to
withdraw, modify or terminate the initial offering without notice and to refuse
any order in whole or in part.
CONTINUOUS OFFERING OF SHARES
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment is $1,000. The minimum subsequent investment is $100. All minimum
investment requirements are waived for certain employee savings plans. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment required is $50. See "Shareholder Services"
below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
(EXPRESSED AS A PERCENTAGE OF THE OFFERING PRICE AND OF THE AMOUNT INVESTED) AS
SHOWN IN THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
-------------------------------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
17
<PAGE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Shares may be purchased at NAV, through Prudential Securities or the Transfer
Agent, by the following persons: (a) Trustees and officers of the Fund and other
Prudential Mutual Funds, (b) employees of Prudential Securities and PMF and
their subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (d) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (e) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 90 days of the commencement of the financial adviser's employment at
Prudential Securities, (ii) the purchase is made with proceeds of a redemption
of shares of any open-end, non-money market fund sponsored by the financial
adviser's previous employer (other than a fund which imposes a distribution or
service fee of .25 of 1% or less) on which no deferred sales load, fee or other
charge was imposed on redemption and (iii) the financial adviser served as the
client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon shares acquired upon
the reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, dividend distribution election, amount being wired and
wiring bank. Instructions should then be given by you to your bank to transfer
funds by wire to State Street Bank and Trust Company (State Street), Boston,
Massachusetts, Custody and Shareholder Services Division, Attention: Prudential
Municipal Series Fund (New York Income Series) specifying on the wire the
account number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (New York Income Series) and your name and individual account number. It is
not necessary to call PMFS to make subsequent purchase orders utilizing Federal
Funds. The minimum amount which may be invested by wire is $1,000.
18
<PAGE>
ALTERNATIVE PURCHASE PLAN
At a special meeting of shareholders held on December 18, 1989, shareholders
of the Fund approved, among other proposals, an Alternative Purchase Plan in
connection with the offer and sale of Fund shares and an amendment to the Fund's
Declaration of Trust to, among other things, classify the shares of beneficial
interest of the Fund into two classes in order to implement the Alternative
Purchase Plan. At a special meeting of shareholders held on July 19, 1994,
shareholders of the Fund approved an amendment to the Fund's Declaration of
Trust authorizing a third class of shares, Class C.
The Series is currently offering only one class of shares. Upon implementation
of the Alternative Purchase Plan by the Series, the Series will commence issuing
two or more classes of shares. The outstanding shares of the Series will be
redesignated Class A shares. The offering of classes of shares will be made by a
new prospectus. There can be no assurance that there will be an offering of
Class B or Class C shares. See "Purchase and Redemption of Fund Shares" in the
Statement of Additional Information.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV PER
SHARE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS
SHARES."
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECKS.
19
<PAGE>
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you would incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon redemption. If the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, will not be allowed for
federal income tax purposes.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. SHARES OF THE SERIES MAY BE
EXCHANGED FOR CLASS A SHARES OF THE OTHER SERIES OF THE FUND AND CLASS A SHARES
OF OTHER PRUDENTIAL MUTUAL FUNDS ON THE BASIS OF THE RELATIVE NAV. AN EXCHANGE
WILL BE TREATED AS A REDEMPTION AND PURCHASE FOR TAX PURPOSES. See "Shareholder
Investment Account-- Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative net asset value of the two funds (or series) next determined after the
request is received in good order. The Exchange Privilege is available only in
states where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
20
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A
SALES CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
which provides for monthly or quarterly checks.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
21
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements 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.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
A-1
<PAGE>
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: The designation Prime-1 indicates a superior ability for repayment
of senior short-term debt obligations.
Prime-2: The designation Prime-2 indicates a strong ability for repayment of
senior short-term debt obligations.
Prime-3: The designation Prime-3 indicates an acceptable ability for
repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. A "+" designation is applied to
those issued rated A-1 which possess an overwhelming degree of safety.
A-2: Capacity for timely payment on issues with the designation A-2 is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
Municipal notes issued after July 29, 1984 are rated SP-1, SP-2 and SP-3.
Municipal notes outstanding on July 29, 1984 carry the same symbols as municipal
bonds. The designation SP-1 indicates a very strong capacity to pay principal
and interest. A "+" is added to those issues determined to possess overwhelming
safety characteristics. An SP-2 designation indicates a satisfactory capacity to
pay principal and interest. An SP-3 designation indicates speculative capacity
to pay principal and interest.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Muncipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
New York Income Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
HOW THE FUND INVESTS............................ 5
Investment Objective and Policies............. 5
Other Investments and Policies................ 9
Investment Restrictions....................... 10
HOW THE FUND IS MANAGED......................... 10
Manager....................................... 10
Distributor................................... 11
Portfolio Transactions........................ 12
Custodian and Transfer and Dividend Disbursing
Agent........................................ 13
HOW THE FUND VALUES ITS SHARES.................. 13
HOW THE FUND CALCULATES PERFORMANCE............. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 14
GENERAL INFORMATION............................. 16
Description of Shares......................... 16
Additional Information........................ 16
SHAREHOLDER GUIDE............................... 17
Initial Offering of Shares.................... 17
Continuous Offering of Shares................. 17
Alternative Purchase Plan..................... 19
How to Sell Your Shares....................... 19
How to Exchange Your Shares................... 20
Shareholder Services.......................... 21
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF
CUSIP No.: 74435M- -
P R O S P E C T U S
D E C E M B E R 30,
1 9 9 4
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW YORK INCOME SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK MONEY MARKET SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Money Market Series)
(the "Series") is one of seventeen series of an open-end, management investment
company, or mutual fund. This Series is diversified and is designed to provide
the highest level of current income that is exempt from New York State, New York
City and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term,
tax-exempt New York State, municipal and local debt obligations and obligations
of other qualifying issuers. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is One Seaport Plaza, New York, New
York 10292, and its telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the New
York Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated December 30, 1994, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the New York Money Market
Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from New York State, New York City and federal
income taxes consistent with liquidity and the preservation of capital. It
seeks to achieve this objective by investing primarily in short-term New
York State, municipal and local government obligations and obligations of
other qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
New York State, New York City and federal income taxes (New York
Obligations). There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" at page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 12.
In seeking to achieve its investment objective, the Series will invest
more than 80% of the value of its total assets in New York Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of New York Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at
page 8.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1994,
PMF served as manager or administrator to 68 investment companies, including
38 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 9.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' shares. The Series currently reimburses PMFD for expenses
related to the distribution of the Series' shares at an annual rate of up to
.125 of 1% of the average daily net assets of the Series. See "How the Fund
is Managed--Distributor" at page 10.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 15 and
"Shareholder Guide--Shareholder Services" at page 21.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities
Incorporated (Prudential Securities or PSI), Pruco Securities Corporation
(Prusec) or directly from the Fund through its transfer agent, Prudential
Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at the net asset
value per share (NAV) next determined after receipt of your purchase order
by the Transfer Agent or Prudential Securities. See "How the Fund Values its
Shares" at page 12 and "Shareholder Guide-- How to Buy Shares of the Fund"
at page 15.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 18.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 12.
3
<PAGE>
FUND EXPENSES
(NEW YORK MONEY MARKET SERIES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases............ None
Maximum Sales Load Imposed on Reinvested
Dividends......................................... None
Deferred Sales Load................................ None
Redemption Fees.................................... None
Exchange Fee....................................... None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.................................... .500%
12b-1 Fees......................................... .125%
Other Expenses..................................... .144%
-----
Total Fund Operating Expenses...................... .769%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:....................................... $ 8 $ 25 $ 43 $ 95
The above example is based on data for the Series' fiscal year ended August 31, 1994. THE EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the various costs and expenses
that an investor in the Series will bear, whether directly or indirectly. For more complete
descriptions of the various costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Series, such as Trustees' and professional fees, registration
fees, reports to shareholders and transfer agency and custodian fees.
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements.
<TABLE>
<CAPTION>
APRIL 30,
1985*
YEAR ENDED AUGUST 31, THROUGH
----------------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------- ------- ------- ------- ------- ------- ------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
.02 .02 .03 .04 .05 .05 .04 .04+ .05+ .01+
Net investment income and
net realized gains......
Dividends and
distributions to
shareholders............ (.02) (.02) (.03) (.04) (.05) (.05) (.04) (.04) (.05) (.01)
------- ------- ------- ------- ------- ------- ------- -------- -------- ----------
Net asset value, end of
period.................. $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- ------- ------- ------- -------- -------- ----------
------- ------- ------- ------- ------- ------- ------- -------- -------- ----------
TOTAL RETURN+++:......... 1.80% 1.80% 2.93% 4.37% 5.14% 5.14% 4.14% 3.66% 4.91% 1.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $269,073 $286,304 $249,785 $236,361 $226,758 $184,615 $168,391 $134,317 $115,738 $24,700
Average net assets
(000)................... $280,492 $275,640 $248,557 $245,494 $218,423 $173,661 $154,746 $139,263 $71,956 $11,099
Ratios to average net
assets:
Expenses, including
distribution fee.... .77% .75% .76% .79% .75% .79% .72% .71%+ .57%+ .12%+**
Expenses, excluding
distribution fee.... .64% .63% .63% .66% .62% .67% .60% .59%+ .45%+ 0%+**
Net investment
income.............. 1.78% 1.75% 2.83% 4.23% 4.99% 5.01% 4.18% 3.53%+ 4.17%+ 4.37%+**
<FN>
- ------------------
*Commencement of investment operations.
**Annualized.
+Net of expense subsidy and/or fee waiver.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since then
has acted as manager of the Fund.
+++Total return is calculated assuming a purchase of shares on the first day and
a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING AND ITS "TAX-EQUIVALENT
YIELD." Tax-equivalent yield shows the taxable yield an investor would have to
earn from a fully taxable investment in order to equal the Series' tax-free
yield after taxes and is calculated by dividing the Series' current or effective
yield by the result of one minus the State tax rate times one minus the federal
tax rate. The following is an example of the yield calculations as of August 31,
1994:
<TABLE>
<S> <C>
Value of hypothetical account at end of period......... $ 1.000429589
Value of hypothetical account at beginning of period... 1.000000000
-----------
Base period return..................................... $ .000429589
-----------
-----------
CURRENT YIELD (.000429589 X (365/7))................... 2.24%
EFFECTIVE ANNUAL YIELD, assuming daily compounding..... 2.26%
TAX-EQUIVALENT CURRENT YIELD (2.24% DIVIDED BY
(1-44.36%))........................................... 4.03%
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1994 was 43 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW YORK MONEY MARKET SERIES
(THE SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO PROVIDE THE
HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM NEW YORK STATE, NEW YORK
CITY AND FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF
CAPITAL. THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING
PRIMARILY IN SHORT-TERM NEW YORK STATE, MUNICIPAL AND LOCAL GOVERNMENT
OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED
IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE
OPINION OF COUNSEL, FROM NEW YORK STATE, NEW YORK CITY AND FEDERAL INCOME TAXES
(NEW YORK OBLIGATIONS). SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THE
STATEMENT OF ADDITIONAL INFORMATION. THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
Interest on municipal obligations may be a preference item for purposes of the
federal alternative minimum tax. The Series may invest without limit in
municipal obligations that are "private activity bonds" (as defined in the
Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
6
<PAGE>
Distributions." Under New York law, dividends paid by the Series are exempt from
New York State and New York City income tax for resident individuals to the
extent they are derived from interest payments on New York Obligations. The New
York Obligations in which the Series may invest include certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and certain variable and
floating rate demand notes. See "Investment Objectives and Policies--Tax-Exempt
Securities--Tax-Exempt Notes" in the Statement of Additional Information. The
Series will maintain a dollar-weighted average maturity of its portfolio of 90
days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION. There is no limit on the amount of such
securities that the Series may purchase. Floating rate securities normally have
a rate of interest which is set as a specific percentage of a designated base
rate, such as the rate on Treasury Bonds or Bills or the prime rate at a major
commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL NEW YORK OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
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) OR (II), IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY
THE INVESTMENT ADVISER UNDER THE SUPERVISION OF THE TRUSTEES. See "Description
of Tax-Exempt Security Ratings" in the Statement of Additional Information. The
investment adviser will monitor the credit quality of securities purchased for
the Series' portfolio and will limit its investments to those which present
minimal credit risks.
In selecting New York Obligations for investment by the Series, the investment
adviser considers ratings assigned by major rating services, information
concerning the financial history and condition of the issuer and its revenue and
expense prospects and, in the case of revenue bonds, the financial history and
condition of the source of revenue to service the bonds. If a New York
Obligation held by the Series is assigned a lower rating or ceases to be rated,
the investment adviser under the supervision of the Trustees will promptly
reassess whether that security presents minimal credit risks and whether the
Series should continue to hold the security in its portfolio. If a portfolio
security no longer presents minimal credit risks or is in default, the Series
will dispose of the security as soon as reasonably practicable unless the
Trustees determine that to do so is not in the best interests of the Series and
its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the Securities and Exchange Commission (SEC). See "How the
Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW YORK OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from New York
State, New York City and federal income taxes or the Series will have at least
80% of its total assets invested in New York Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or taxable cash
equivalents such as certificates of deposit, bankers acceptances and time
deposits or other short-term taxable investments such as repurchase agreements,
or high grade taxable obligations, including obligations that are exempt from
federal, but not New York City or New York State, taxation. When, in the opinion
of the investment adviser, abnormal market conditions require a temporary
defensive position, the Series may invest more than 20% of the value of its
assets in short-term debt securities other than New York Obligations or may
invest its assets so that more than 20% of the income is subject to New York
State, New York City or federal income taxes. The Series will treat an
investment in a municipal bond refunded with escrowed U.S. Government securities
as U.S. Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
7
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) 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 (b) if only one
such rating organization assigned a rating, by that rating organization; 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 two
highest quality grades; or (3) the put is backed by a letter of credit or
similar financial guarantee issued by a person having securities outstanding
which are rated within the two highest quality grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase; the purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW YORK OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New York Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN NEW YORK OBLIGATIONS AND BECAUSE
IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW YORK OBLIGATIONS, IT IS MORE
SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF NEW YORK OBLIGATIONS THAN
IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT CONCENTRATED IN SUCH
OBLIGATIONS TO THIS DEGREE. An investment in the Series therefore may involve
more risk than an investment in other types of money market funds. New York's
budgets for fiscal years 1992-1993 and 1993-1994 have produced cash surpluses
for the first time since fiscal year 1987-1988. The 1994-1995 budget is
projected to result in a substantial deficit, possibly as large as $5 billion.
There can be no assurances that the State will not face substantial potential
budget gaps in future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and
8
<PAGE>
disbursements in future fiscal years. If either New York State or any of its
local governmental entities is unable to meet its financial obligations, the
income derived by the Series, the ability to preserve or realize appreciation of
the Series' capital and the Series' liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the SEC. See "Investment Objectives and
Policies--Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may invest up to 10% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. The investment adviser will monitor the liquidity of such restricted
securities under the supervision of the Trustees. See "Investment Objectives and
Policies--Illiquid Securities" in the Statement of Additional Information.
Repurchase agreements subject to demand are deemed to have a maturity equal to
the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of its average net assets were .77%. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET
9
<PAGE>
ASSETS OF THE SERIES. It was incorporated in May 1987 under the laws of the
State of Delaware. For the fiscal year ended August 31, 1994, the Series paid a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses" and "Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD OR THE DISTRIBUTOR), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE SERIES'
SHARES. IT IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities Incorporated
(Prudential Securities or PSI) and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, account servicing fees paid
to, or on account of, other broker-dealers or financial institutions (other than
national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses. The State of Texas requires that
shares of the Series may be sold in that state only by dealers or other
financial institutions which are registered there as broker-dealers.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF .125 OF 1% OF THE AVERAGE
DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on the
average balance of the Series' shares held in the accounts of the customers of
financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1994, the Series paid PMFD a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
10
<PAGE>
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers and other persons which distribute shares of the Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
For the fiscal year ended August 31, 1994, PMFD incurred distribution expenses
in the aggregate of $350,615 with respect to the Series, all of which was
recovered through the distribution fee paid by the Series to PMFD. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Purchases of portfolio securities are made from dealers, underwriters and
issuers; sales prior to maturity are made, for the most part, to dealers and
issuers. The Series does not normally incur any brokerage commission expense on
such transactions. The instruments purchased by the Series generally are 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. Securities purchased in underwritten offerings include a
fixed amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. When securities are purchased or sold
directly from or to an issuer, no commissions or discounts are paid. The policy
of the Series regarding purchases and sales of securities is that primary
consideration will be given to obtaining the most favorable price and efficient
execution of transactions.
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
11
<PAGE>
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days the New York Stock Exchange
is open for trading, except on days on which no orders to purchase, sell or
redeem shares have been received by the Series or days on which changes in the
value of the Series' portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or,
12
<PAGE>
in the case of a security issued at an original issue discount, the revised
issue price of the security). The market discount rule does not apply to any
security that was acquired by the Series at its original issue. See
"Distributions and Tax Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income. The Series does not expect to realize
long-term capital gains.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under New York law, dividends paid by the Series are exempt from New York
State and New York City income taxes for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE OR SUCH OTHER
DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS
AND DISTRIBUTIONS IN CASH.
13
<PAGE>
Such election should be submitted to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
The Fund will notify each shareholder after the close of the Fund's taxable year
of both the dollar amount and the taxable status of that year's dividends and
distributions.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984 BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares within each series. All
series of the Fund, except for the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series, the New
York Income Series and the New York Money Market Series, offer three classes,
designated Class A, Class B and Class C shares. The Connecticut Money Market
Series, the Massachusetts Money Market Series, the New Jersey Money Market
Series and the New York Money Market Series offer only one class of shares.
Pursuant to the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
14
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment is $1,000. The minimum subsequent investment is $100. All minimum
investment requirements are waived for the Command Account program (if the
Series is designated as your primary fund) and certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD, WITHOUT A SALES CHARGE, AT THE NAV PER SHARE
NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E., CHECK OR FEDERAL FUNDS
WIRED TO PMFS). See "How the Fund Values its Shares." When payment is received
by PMFS prior to 4:30 P.M., New York time, in proper form, a share purchase
order will be entered at the price determined as of 4:30 P.M., New York time, on
that day, and dividends on the shares purchased will begin on the business day
following such investment. See "Taxes, Dividends and Distributions."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
15
<PAGE>
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT. Prudential Securities has advised the Fund that it has
instituted procedures pursuant to which, upon enrollment by a Prudential
Securities client, Prudential Securities will make automatic investments of free
credit balances of $1,000 or more ($1.00 for IRAs) (Eligible Credit Balances)
held in such client's account in shares of the Series (Autosweep). To effect the
automatic investment of Eligible Credit Balances representing the proceeds from
the sale of securities, Prudential Securities will enter orders for the purchase
of shares of the Series at the opening of business on the day following the
settlement of such securities transaction; to effect the automatic investment of
Eligible Credit Balances representing non-trade related credits, Prudential
Securities will enter orders for the purchase of shares of the Series at the
opening of business semi-monthly. All shares purchased pursuant to such
procedures will be issued at the NAV of such shares determined on the date the
order is entered and will receive the next dividend declared after such shares
are issued.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
registered representative accompanied by payment for the purchase price of such
shares and, in the case of a new account, a completed application form. You
should also submit an IRS Form W-9. The Prusec registered representative will
then forward these items to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, New York Money Market Series, specifying on the wire the account
number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to 4:30
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day and receive dividends commencing on the next business day.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (New York Money Market Series) and your name and individual account number.
It is not necessary to call PMFS to make subsequent purchase orders utilizing
Federal Funds. The minimum amount which may be invested by wire is $1,000.
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services, Inc.,
Attention: Investment Services, P.O. Box 15020, New Brunswick, New Jersey
08906-5020, together with payment for the purchase price of such shares and, in
the case of a new account, a completed application form. You should also submit
an IRS Form W-9. If PMFS receives an order to purchase shares of the Series and
payment in proper form prior to 4:30 P.M., New York time, the purchase order
will be effective that day and you will begin earning dividends the following
16
<PAGE>
business day. See "Taxes, Dividends and Distributions." Checks should be made
payable to Prudential Municipal Series Fund, New York Money Market Series.
Certified checks are not necessary, but checks must be drawn on a bank located
in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares" below. The minimum initial investment by check is $1,000 and the minimum
subsequent investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in federal
funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-R- Account, including Visa purchases, cash advances and Visa Account
checks. Each Advantage Account Program Securities Account will be automatically
scanned for debits each business day as of the close of business on that day and
after application of any free credit cash balances in the account to such
debits, a sufficient number of shares of the Series (if selected as the primary
fund) and, if necessary, shares of other Advantage Account funds owned by the
Advantage Account Program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PMF
which are not primary Advantage Account funds will be redeemed as of that
business day to satisfy any remaining debits in the Securities Account. Shares
may not be purchased until all debits, overdrafts and other requirements in the
Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command-SM- Account program, an integrated financial services program of
Prudential Securities. Investors having a Command Account may select the Series
as their primary fund. Such investors will have free credit cash balances of
$1.00 or more in their Securities Account (Available Cash) (a component of the
Command Account program) automatically invested in shares of the Series as
described below. Specifically, an order to purchase shares of the Series is
placed (i) in the case of Available Cash resulting from the proceeds of
securities sales, on the settlement date of the securities sale, and (ii) in the
case of Available Cash resulting from non-trade related credits (I.E., receipt
of dividends and interest payments, or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate Command Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund. There are no minimum investment requirements for participants in the
Command Account program.
17
<PAGE>
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Command program, such as those incurred by use of the Visa Gold
Account, including Visa purchases, cash advances and Visa Account checks. Each
Command program Securities Account will be automatically scanned for debits
monthly for all Visa purchases incurred during that month and each business day
as of the close of business on that day for all cash advances and check charges
as incurred and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series and, if
necessary, shares of other Command funds owned by the Command program
participant which have not been selected as his or her primary fund or shares of
a participant's money market funds managed by PMF which are not primary Command
funds will be redeemed as of that business day to satisfy any remaining debits
in the Securities Account. The single monthly debit for Visa purchases will be
made on the twenty-fifth day of each month, or the prior business day if the
twenty-fifth falls on a weekend or holiday. Margin loans will be utilized to
satisfy debits remaining after the liquidation of all shares of the Series in a
Securities Account, and shares may not be purchased until all debits, margin
loans and other requirements in the Securities Account are satisfied. Command
Account participants will not be entitled to dividends declared on the date of
redemption.
For information on participation in the Command Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution". An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekends or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
18
<PAGE>
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest higher dollar
unless the client notifies Prudential Securities to the contrary. The amount of
the redemption will be the lesser of (a) the total net asset value of the
Series' shares held in the client's Prudential Securities account or (b) the
deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client utilizing this automatic redemption procedure and who wishes
to pay for a securities transaction or satisfy any other debit balance in his or
her account other than through this automatic redemption procedure must do so
not later than the day of settlement for such securities transaction or the date
the debit balance is incurred. Prudential Securities clients who have elected to
utilize Autosweep will not be entitled to dividends declared on the date of
redemption.
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth below and the form returned to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services, Inc. at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
19
<PAGE>
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C
shares of other series of the Fund or Class C shares of the Prudential Mutual
Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal indentification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED
ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
20
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should
contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic charge to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available
for shareholders which provides for monthly or quarterly checks. See "How to
Sell Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and
other institutions that wish to open multiple accounts. An institution may
open a single master account by filing an application form with the Transfer
Agent. Attention: Customer Service, P.O. Box 15005, New Brunswick, New
Jersey 08906, signed by personnel authorized to act for the institution.
Individual sub-accounts may be opened at the time the master account is
opened by listing them, or they may be added at a later date by written
advice or by filing forms supplied by the Fund. Procedures are available to
identify sub-accounts by name and number within the master account name. The
investment minimums set forth above are applicable to the aggregate amounts
invested by a group and not to the amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
21
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund. Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
This page intentionally left blank
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................ 2
Risk Factors and Special Characteristics..... 2
FUND EXPENSES.................................. 4
FINANCIAL HIGHLIGHTS........................... 5
CALCULATION OF YIELD........................... 6
HOW THE FUND INVESTS........................... 6
Investment Objective and Policies............ 6
Other Investments and Policies............... 9
Investment Restrictions...................... 9
HOW THE FUND IS MANAGED........................ 9
Manager...................................... 9
Distributor.................................. 10
Portfolio Transactions....................... 11
Custodian and Transfer and
Dividend Disbursing Agent................... 12
HOW THE FUND VALUES ITS SHARES................. 12
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 12
GENERAL INFORMATION............................ 14
Description of Shares........................ 14
Additional Information....................... 14
SHAREHOLDER GUIDE.............................. 15
How to Buy Shares of the Fund................ 15
How to Sell Your Shares...................... 18
How to Exchange Your Shares.................. 20
Shareholder Services......................... 21
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
</TABLE>
-------------------------------------------
MF139A 444240c
CUSIP No: 74435M-72-1
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL SERIES
FUND
(NEW YORK MONEY MARKET SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NORTH CAROLINA SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (North Carolina Series) (the
"Series") is one of seventeen series of an open-end, management investment
company, or mutual fund. This Series is diversified and is designed to provide
the maximum amount of income that is exempt from North Carolina State and
federal income taxes consistent with the preservation of capital and, in
conjunction therewith, the Series may invest in debt securities with the
potential for capital gain. The net assets of the Series are invested in
obligations within the four highest ratings of either Moody's Investors Service
or Standard & Poor's Ratings Group or in unrated obligations which, in the
opinion of the Fund's investment adviser, are of comparable quality. There can
be no assurance that the Series' investment objective will be achieved. See "How
the Fund Invests--Investment Objective and Policies." The Fund's address is One
Seaport Plaza, New York, New York 10292, and its telephone number is (800)
225-1852.
This Prospectus sets forth concisely the information about the Fund and the
North Carolina Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in seventeen series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the North Carolina Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from North Carolina State and federal income taxes consistent with
the preservation of capital. It seeks to achieve this objective by investing
primarily in North Carolina State, municipal and local government
obligations and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the Virgin Islands and Guam, which pay income
exempt, in the opinion of counsel, from North Carolina State and federal
income taxes (North Carolina Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in North Carolina Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of North Carolina
Obligations. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 12. To hedge against changes in
interest rates, the Series may also purchase put options and engage in
transactions involving derivatives, including financial futures contracts
and options thereon. See "How the Fund Invests--Investment Objective and
Policies--Futures Contracts and Options Thereon" at page 11.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1994,
PMF served as manager or administrator to 68 investment companies, including
38 mutual funds, with aggregate assets of approximately $47 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is Managed--
Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and is paid an annual distribution and service
fee which is currently being charged at the rate of .10 of 1% of the average
daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily
net assets of the Class B shares and is paid an annual distribution and
service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 21 and
"Shareholder Guide--Shareholder Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 16 and "Shareholder Guide-- How to Buy
Shares of the Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A
shares, Class B shares will automatically convert
to Class A shares (which are subject to lower
ongoing distribution-related expenses)
approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing
distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 17.
3
<PAGE>
FUND EXPENSES
(NORTH CAROLINA SERIES)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------ --------------------- ---------------------
Maximum Sales Load Imposed on Purchases (as a 3% None None
percentage of offering price)...................
Maximum Sales Load or Deferred Sales Load Imposed None None None
on Reinvested Dividends.........................
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever None 5% during the first 1% on redemptions
is lower)....................................... year, decreasing by made within one year
1% annually to 1% in of purchase
the fifth and sixth
years and 0% the
seventh year*
None None None
Redemption Fees..................................
None None None
Exchange Fee.....................................
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B CLASS C
-------------- SHARES SHARES
------------- -------------
<S> <C> <C> <C>
Management Fees.......................... .50% .50 % .50 %
12b-1 Fees............................... .10++ .50 .75 ++
Other Expenses........................... .28 .28 .28
--- --- ---
Total Fund Operating Expenses............ .88% 1.28 % 1.53 %
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and
(2) redemption at the end of each
time period:
Class A........................ $39 $ 57 $ 77 $135
Class B........................ $63 $ 71 $ 80 $138
Class C........................ $26 $ 48 $ 83 $182
You would pay the following
expenses on the same investment,
assuming no redemption:
Class A........................ $39 $ 57 $ 77 $135
Class B........................ $13 $ 41 $ 70 $138
Class C........................ $16 $ 48 $ 83 $182
The above example with respect to Class A and Class B shares is based on
data for the Series' fiscal year ended August 31, 1994. The above example
with respect to Class C shares is based on expenses expected to have been
incurred if Class C shares had been in existence during the entire fiscal
year ended August 31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
<FN>
---------------------
*Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
+Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1995. Total Fund Operating Expenses of the Class A and Class C
shares without such limitations would be 1.08% and 1.78%, respectively. See
"How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------
JANUARY 22,
YEAR ENDED 1990*
AUGUST 31, THROUGH
--------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $12.04 $11.37 $10.86 $10.45 $10.63
------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .61 .65 .67 .67 .41
Net realized and unrealized
gain (loss) on investment
transactions................. (.76) .67 .51 .41 (.18)
------ ------ ------ ------ -----------
Total from investment
operations............... (.15) 1.32 1.18 1.08 .23
------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.61) (.65) (.67) (.67) (.41)
Distributions from net
realized gains............... (.22) -- -- -- --
------ ------ ------ ------ -----------
Total distributions....... (.83) (.65) (.67) (.67) (.41)
------ ------ ------ ------ -----------
Net asset value, end of
period....................... $11.06 $12.04 $11.37 $10.86 $10.45
------ ------ ------ ------ -----------
------ ------ ------ ------ -----------
TOTAL RETURN+:................ (1.35)% 11.99% 11.12% 10.63% 2.09%
RATIOS/SUPPLEMENTAL DATA:
Net asset, end of period
(000)........................ $2,256 $1,777 $ 917 $ 362 $ 58
Average net assets (000)...... $2,067 $1,316 $ 612 $ 246 $ 32
Ratios to average net assets:
Expenses, including
distribution fee........... .88% .87% .91% .99% 1.00%**
Expenses, excluding
distribution fee........... .78% .77% .81% .89% .90%**
Net investment income....... 5.31% 5.55% 5.90% 6.24% 6.24%**
Portfolio turnover............ 17% 38% 36% 27% 24%
<FN>
- ---------------
*Commencement of offering of Class A shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
FEBRUARY 13,
1985*
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------- ------- ------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35 $ 10.59 $ 11.32 $ 10.04 $10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .56 .60 .62 .63 .64 .65 .69+ .70+ .78+ .41+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.77) .68 .51 .41 (.20) .30 (.24) (.61) 1.31 .04
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total from
investment
operations..... (.21) 1.28 1.13 1.04 .44 .95 .45 .09 2.09 .45
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.56) (.60) (.62) (.63) (.64) (.65) (.69) (.70) (.78) (.41)
Distributions from
net realized
gains.............. (.22) -- -- -- -- -- -- (.12) (.03) --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Total
distributions... (.78) (.60) (.62) (.63) (.64) (.65) (.69) (.82) (.81) (.41)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end
of period.......... $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35 $ 10.59 $ 11.32 $10.04
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN+++:.... (1.82)% 11.62% 10.64% 10.17% 4.28% 9.39% 4.47% .74% 21.61% 4.28%
RATIOS/SUPPLEMENTAL
DATA:
Net asset, end of
period (000)....... $69,448 $75,515 $63,573 $59,875 $57,429 $34,222 $44,076 $39,477 $25,395 $8,172
Average net assets
(000).............. $73,606 $67,997 $60,751 $59,071 $56,745 $49,868 $40,442 $35,368 $17,261 $5,775
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.28% 1.27% 1.31% 1.39% 1.38% 1.39% 1.13%+ 1.06%+ 1.00%+ .85%+**
Expenses,
excluding
distribution
fee.............. .78% .77% .81% .89% .89% .89% .64%+ .57%+ .52%+ .37%+**
Net investment
income........... 4.89% 5.18% 5.58% 5.88% 5.96% 6.06% 6.58%+ 6.15%+ 6.72%+ 6.87%+**
Portfolio
turnover........... 17% 38% 36% 27% 24% 47% 66% 37% 34% 35%
<FN>
- ---------------
*Commencement of offering of Class B shares.
**Annualized.
+Net of expense subsidy.
++On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class C share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-----------------
AUGUST 1,
1994*
THROUGH
AUGUST 31,
1994
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.09
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .04
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+:.......................... .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 10
Average net assets (000)................ $ 5
Ratios to average net assets:#
Expenses, including distribution
fee.................................. 1.67%**
Expenses, excluding distribution
fee.................................. .92%**
Net investment income................. 5.06%**
Portfolio turnover...................... 17%
<FN>
- ---------------
*Commencement of offering of Class C shares.
**Annualized.
+Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends. Total
return is not annualized.
#Because of the event referred to in * and the timing of such, the ratios for
Class C shares are not necessarily comparable to those of Class A or Class B
shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NORTH CAROLINA SERIES (THE
SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM NORTH CAROLINA STATE AND FEDERAL INCOME TAXES
CONSISTENT WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE
SERIES MAY INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See
"Investment Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NORTH CAROLINA STATE, MUNICIPAL AND LOCAL
GOVERNMENTAL OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM NORTH CAROLINA STATE AND FEDERAL INCOME
TAXES (NORTH CAROLINA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under North Carolina law, dividends distributed by the Series
and attributable to interest on obligations issued by North Carolina and its
political subdivisions are exempt from North Carolina individual, trust and
estate income taxes. See "Taxes, Dividends and Distributions." North Carolina
Obligations could include general obligation bonds of the State, counties,
cities, towns, etc., revenue bonds of utility systems, highways, bridges, port
and airport facilities, colleges, hospitals, etc., and industrial development
and pollution control bonds. The Series will invest in long-term obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities, provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL NORTH CAROLINA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT
GRADE" SECURITIES. In other words, all of the North Carolina Obligations will,
at the time of purchase, be rated within the four highest quality grades as
determined by either Moody's Investors Service (Moody's) (currently Aaa, Aa, A,
Baa for bonds, MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial
paper) or Standard & Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for
bonds, SP-1, SP-2 for notes and A-1 for commercial paper) or, if unrated, will
possess creditworthiness, in the opinion of the investment adviser, comparable
to securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase North Carolina Obligations
which, in the opinion of the investment adviser, offer the opportunity for
capital appreciation. This may occur, for example, when the investment adviser
believes that the issuer of a particular North Carolina Obligation might receive
an upgraded credit standing, thereby increasing the market value of the bonds it
has issued or when the investment adviser believes that interest rates might
decline. As a general matter, bond prices and the Series' net asset value will
vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NORTH CAROLINA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from North
Carolina and federal income taxes or the Series will have at least 80% of its
total assets invested in North Carolina Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes, or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than North Carolina Obligations or may
invest its assets so that more than 20% of the income is subject to North
Carolina State or federal income taxes. The Series will treat an investment in a
municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NORTH CAROLINA
OBLIGATIONS WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the North Carolina Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
10
<PAGE>
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information. Finally, the Series must eliminate all of
its positions in futures contracts and options thereon by December 31 of each
year in order to comply with requirements for exemption from the North Carolina
intangibles tax.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and
11
<PAGE>
movements in interest rates and, in turn, the prices of the securities that are
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NORTH CAROLINA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED
FROM NORTH CAROLINA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
AFFECTING ISSUERS OF NORTH CAROLINA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE.
Despite stressful periods during the latest recession that depleted fund
reserves and ended with General Fund deficits, prudent steps were taken to
control fiscal decline with resulting operating surpluses in fiscal 1992 and
1993. For fiscal 1994, restrained expenditure growth combined with conservative
revenue assumptions again yielded positive results. The General Fund balance
forecast for the end of the 1994-1995 fiscal year is approximately $310 million.
If either North Carolina or any of its local governmental entities is unable to
meet its financial obligations, the income derived by the Series, the ability to
preserve or realize appreciation of the Series' capital and the Series'
liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
12
<PAGE>
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .88%, 1.28% and 1.67% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since October 1991 and has been employed by PIC as a portfolio manager since
September 1989 and prior thereto was employed in an administrative capacity at
PIC since August 1988.
13
<PAGE>
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net assets
of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $2,067
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $26,500 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the
14
<PAGE>
average daily net assets of the Class C shares, and (ii) a service fee of up to
.25 of 1% of the average daily net assets of the Class C shares. The service fee
is used to pay for personal service and/or the maintenance of shareholder
accounts. Prudential Securities has agreed to limit its distribution-related
fees payable under the Class C Plan to .75 of 1% of the average daily net assets
of the Class C shares for the fiscal year ending August 31, 1995. Prudential
Securities also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $387,134 under the Class B Plan and
received $368,035 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $64,600 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has
15
<PAGE>
complied with the terms of the agreement, no prosecution will be instituted by
the United States for the offenses charged in the complaint. If on the other
hand, during the course of the three year period, PSI violates the terms of the
agreement, the U.S. Attorney can then elect to pursue these charges. Under the
terms of the agreement, PSI agreed, among other things, to pay an additional
$330,000,000 into the fund established by the SEC to pay restitution to
investors who purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171 serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
16
<PAGE>
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market"
17
<PAGE>
for federal income tax purposes; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on these "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. See
"Distributions and Tax Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders is currently the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
18
<PAGE>
In the opinion of North Carolina tax counsel, distributions will not be
subject to North Carolina income tax if made to individual shareholders resident
in North Carolina or to trusts or estates subject to North Carolina income tax
to the extent such distributions are either (i) exempt from federal income tax
and attributable to interest on obligations of North Carolina or its political
subdivisions; nonprofit educational institutions organized or chartered under
the laws of North Carolina; or Guam, Puerto Rico or the United States Virgin
Islands including the governments thereof and their agencies, instrumentalities,
and authorities or (ii) attributable to interest on direct obligations of the
United States.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series will elect to treat net
capital losses of approximately $107,146 incurred in the ten month period ended
August 31, 1994 as having been incurred in the following fiscal year. Dividends
paid by the Series with respect to each class of shares, to the extent any
distributions are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount except that each class will bear
its own distribution charges, generally resulting in lower dividends for Class B
and Class C shares. Distributions of net capital gains, if any, will be paid in
the same amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
19
<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
20
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
21
<PAGE>
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
22
<PAGE>
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such
23
<PAGE>
person's employer and (e) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 90 days of the commencement of the
financial adviser's employment at Prudential Securities, (ii) the purchase is
made with proceeds of a redemption of shares of any open-end, non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) on which no
deferred sales load, fee or other charge was imposed on redemption and (iii) the
financial adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISOR. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency, or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
24
<PAGE>
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
25
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- ----------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0%
Third................................................................. 3.0%
Fourth................................................................ 2.0%
Fifth................................................................. 1.0%
Sixth................................................................. 1.0%
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
26
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE
27
<PAGE>
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B and
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales
28
<PAGE>
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares
through Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks in any amount.
Withdrawals of Class B and Class C shares may be subject to a CDSC. See "How
to Sell Your Shares--Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
PAGE
---
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend
Disbursing Agent............................. 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 20
Description of Shares......................... 20
Additional Information........................ 21
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 26
How to Exchange Your Shares................... 27
Shareholder Services.......................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
- -------------------------------------------
MF 126A 44404HI
Class A: 74435M-81-2
CUSIP Nos.: Class B: 74435M-82-0
Class C: 74435M-51-5
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NORTH CAROLINA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(OHIO SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Ohio Series) (the "Series") is
one of seventeen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from Ohio State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Ratings Group or in unrated
obligations which, in the opinion of the Fund's investment adviser, are of
comparable quality. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the Ohio
Series that a prospective investor should know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated December 30, 1994,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Ohio Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Ohio State and federal income taxes consistent with the preservation of
capital. It seeks to achieve this objective by investing primarily in Ohio
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin Islands
and Guam, which pay income exempt, in the opinion of counsel, from Ohio State
and federal income taxes (Ohio Obligations). There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Ohio Obligations. This degree of
investment concentration makes the Series particularly susceptible to factors
adversely affecting issuers of Ohio Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page 12.
To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 11.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder
Guide--Shareholder Services" at page 29.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
-Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
-Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
-Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 18.
3
<PAGE>
FUND EXPENSES
(OHIO SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------- ------------------- -------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)...................... 3% None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends............................ None None None
Deferred Sales Load (as a percentage
of original purchase price or
redemption proceeds, whichever is
lower)............................... None 5% during the first 1% on redemptions
year, decreasing by made within one
1% annually to 1% year of purchase
in the fifth and
sixth years and 0%
the seventh year*
Redemption Fees....................... None None None
Exchange Fee.......................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
Management Fees....................... .50% .50% .50%
12b-1 Fees............................ .10++ .50 .75++
Other Expenses........................ .24 .24 .24
---- ---- -----
Total Fund Operating Expenses......... .84% 1.24% 1.49%
---- ---- -----
---- ---- -----
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- --------------------------------------------------------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A................................................................ $ 38 $ 56 $ 75 $ 131
Class B................................................................ $ 63 $ 69 $ 78 $ 134
Class C................................................................ $ 25 $ 47 $ 81 $ 178
You would pay the following expenses on the same investment, assuming no
redemption:
Class A................................................................ $ 38 $ 56 $ 75 $ 131
Class B................................................................ $ 13 $ 39 $ 68 $ 134
Class C................................................................ $ 15 $ 47 $ 81 $ 178
The above example with respect to Class A and Class B shares is based on data for the Series' fiscal
year ended August 31, 1994. The above example with respect to Class C shares is based on expenses
expected to have been incurred if Class C shares had been in existence during the entire fiscal year
ended August 31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that
an investor in the Series will bear, whether directly or indirectly. For more complete descriptions of
the various costs and expenses, see "How the Fund is Managed." "Other Expenses" includes operating
expenses of the Series, such as Trustees' and professional fees, registration fees, reports to
shareholders and transfer agency and custodian fees.
<FN>
- -------------
* Class B shares will automatically convert to Class A shares approximately seven years after
purchase. See "Shareholder Guide--Conversion Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc., the aggregate initial
sales charges, deferred sales charges and asset-based sales charges on shares of the Series may not
exceed 6.25% of total gross sales, subject to certain exclusions. This 6.25% limitation is imposed
on each class of the Series rather than on a per shareholder basis. Therefore, long-term
shareholders of the Series may pay more in total sales charges than the economic equivalent of 6.25%
of such shareholders' investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that the Fund may pay a
distribution fee of up to .30 of 1% and 1% per annum of the average daily net assets of the Class A
and Class C shares, respectively, the Distributor has agreed to limit its distribution fees with
respect to the Class A and Class C shares of the Series to no more than .10 of 1% and .75 of 1% of
the average daily net asset value of the Class A shares and Class C shares, respectively, for the
fiscal year ending August 31, 1995. Total Fund Operating Expenses of the Class A and Class C shares
without such limitations would be 1.04% and 1.74%, respectively. See "How the Fund is
Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the periods indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
----------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
-------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 12.38 $11.69 $11.17 $10.71 $ 10.85
-------- ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .66 .69 .70 .70 .47
Net realized and
unrealized gain (loss)
on investment
transactions............ (.66) .69 .52 .46 (.14)
-------- ------ ------ ------ -----------
Total from investment
operations.......... -- 1.38 1.22 1.16 .33
-------- ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.66) (.69) (.70) (.70) (.47)
-------- ------ ------ ------ -----------
Net asset value, end of
period.................. $ 11.72 $12.38 $11.69 $11.17 $ 10.71
-------- ------ ------ ------ -----------
-------- ------ ------ ------ -----------
TOTAL RETURN+:........... (0.01)% 12.12% 11.26% 11.06% 2.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 4,749 $4,647 $2,095 $923 $462
Average net assets
(000)................... $ 4,733 $2,904 $1,289 $615 $289
Ratios to average net
assets:
Expenses, including
distribution fee...... .84% .84% .81% .93% .96%**
Expenses, excluding
distribution fee...... .74% .74% .71% .83% .86%**
Net investment
income................ 5.45% 5.73% 6.34% 6.34% 6.51%**
Portfolio turnover....... 20% 28% 37% 37% 24%
<FN>
- ------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends.
Total returns for periods of less than a full year are not annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------
SEPTEMBER 20,
1984*
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------- ------ ------- ------- ------- ------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 12.38 $11.70 $ 11.18 $ 10.71 $ 10.85 $10.53 $ 10.89 $ 11.70 $ 10.69 $ 10.00
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .61 .65 .65 .65 .66 .67 .71 .74+ .82+ .74+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.65) .68 .52 .47 (.14) .32 (.36) (.66) 1.14 .69
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total from
investment
operations..... (.04) 1.33 1.17 1.12 .52 .99 .35 .08 1.96 1.43
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.61) (.65) (.65) (.65) (.66) (.67) (.71) (.74) (.82) (.74)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- (.15) (.13) --
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total
distributions... (.61) (.65) (.65) (.65) (.66) (.67) (.71) (.89) (.95) (.74)
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Net asset value, end
of period.......... $ 11.73 $12.38 $11.70 $11.18 $10.71 $10.85 $10.53 $10.89 $11.70 $10.69
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
TOTAL RETURN+++:.... (0.33)% 11.58% 10.79% 10.74% 4.87% 9.68% 3.52% 0.64% 19.34% 14.58%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $118,270 $121,937 $102,199 $92,572 $89,183 $87,426 $73,972 $75,833 $51,587 $22,331
Average net assets
(000).............. $121,365 $110,053 $96,178 $90,437 $89,302 $81,613 $72,333 $69,995 $38,725 $12,729
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.24% 1.24% 1.21% 1.33% 1.32% 1.32% 1.24% 1.15%+ 1.13%+ 1.15%+**
Expenses,
excluding
distribution
fee.............. .74% .74% .71% .83% .84% .84% .75% .66%+ .65%+ .68%+**
Net investment
income........... 5.05% 5.33% 5.73% 5.94% 6.08% 6.17% 6.79% 6.43%+ 6.98%+ 7.34%+**
Portfolio
turnover........... 20% 28% 37% 37% 24% 41% 127% 120% 50% 72%
<FN>
- ------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
beneficial interest outstanding, total return, ratios to average net assets and
other supplemental data for the period indicated. This information is based on
data contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
-------------
AUGUST 1,
1994* 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 DISTRIBUTIONS
- -------------------------
Dividends from net
investment income....... (.05)
------
Net asset value, end of
period.................. $ 11.73
------
------
TOTAL RETURN+:........... 0.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period.................. $ 5,227
Average net assets....... $ 1,752
Ratios to average net
assets:#
Expenses, including
distribution fee...... 2.28%**
Expenses, excluding
distribution fee...... 1.53%**
Net investment
income................ 4.73%**
Portfolio turnover....... 20%
<FN>
- ------------
* Commencement of offering of Class C shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends.
Total return is not annualized.
# Because of the event referred to in * and the timing of such, the ratios for
the Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE OHIO SERIES (THE SERIES) IS
DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS
EXEMPT FROM OHIO STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION
OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT
SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives and
Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN OHIO STATE, MUNICIPAL AND LOCAL GOVERNMENT
OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED
IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE
OPINION OF COUNSEL, FROM OHIO STATE AND FEDERAL INCOME TAXES (OHIO OBLIGATIONS).
THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT
OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Ohio law, dividends paid by the Series are exempt from
Ohio personal income tax and Ohio school district income taxes for resident
individuals to the extent they are derived from interest payments on Ohio
Obligations. Ohio Obligations could include general obligation bonds of the
State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL OHIO OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Ohio Obligations will, at the time of
purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds,
MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Ohio Obligations which, in
the opinion of the investment adviser, offer the opportunity for capital
appreciation. This may occur, for example, when the investment adviser believes
that the issuer of a particular Ohio Obligation might receive an upgraded credit
standing, thereby increasing the market value of the bonds it has issued or when
the investment adviser believes that interest rates might decline. As a general
matter, bond prices and the Series' net asset value will vary inversely with
interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN OHIO OBLIGATIONS. As a matter of
fundamental policy, during normal market conditions the Series' assets will be
invested so that at least 80% of the income will be exempt from Ohio State and
federal income taxes or the Series will have at least 80% of its total assets
invested in Ohio Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation and the Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Ohio Obligations or may invest its assets so that more
than 20% of the income is subject to Ohio State or federal income taxes. The
Series will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON OHIO OBLIGATIONS WHICH
IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Ohio Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
10
<PAGE>
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and
11
<PAGE>
movements in interest rates and, in turn, the prices of the securities that are
the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN OHIO OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM OHIO
OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF
OHIO OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Ohio has encountered financial
difficulties over some prior years. While Ohio has faced revenue shortfalls, the
State has acted promptly in addressing budgetary shortfalls with spending
reductions and by tax adjustments. The 1994-1995 biennial budget effective in
July 1993 anticipates an increase in spending and includes all General Revenue
Fund appropriations for biennial State debt service and lease rental payments.
If either Ohio or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Series, the ability to preserve
or realize appreciation of the Series' capital and the Series' liquidity could
be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
12
<PAGE>
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .84%, 1.24% and 2.28% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Christian Smith, an Investment
Associate of Prudential Investment Advisors. Mr. Smith has responsibility for
the day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
13
<PAGE>
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or other financial institutions which are registered
there as broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The Class A Plan provides
that (i) up to .25 of 1% of the average daily net assets of the Class A shares
may be used to pay for personal service and/ or the maintenance of shareholder
accounts (service fee) and (ii) total distribution fees (including the service
fee of .25 of 1%) may not exceed .30 of 1% of the average daily net assets of
the Class A shares. PMFD has agreed to limit its distribution-related fees
payable under the Class A Plan to .10 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $4,733
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $72,700 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up
14
<PAGE>
to .25 of 1% of the average daily net assets of the Class B shares; provided
that the total distribution-related fee does not exceed .50 of 1%. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $792,100 under the Class B Plan and
received $606,825 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $96,400 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by
15
<PAGE>
purchasers of the partnership interests. 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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
16
<PAGE>
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
17
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends of net taxable investment income, together with distributions of
net short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for individuals is 28%. The maximum long-term capital gains
rate for corporate shareholders is currently the same as the maximum tax rate
for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
18
<PAGE>
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under Ohio law, dividends paid by the Series are exempt from the Ohio personal
income tax and municipal and school district income taxes in Ohio to the extent
such dividends are properly attributable to interest payments on Ohio
Obligations, provided that the Series continues to qualify as a regulated
investment company for federal income tax purposes and that at all times at
least 50% of the value of the total assets of the Series consists of obligations
issued by or on behalf of the State of Ohio, political subdivisions thereof and
agencies and instrumentalities of the State or its political subdivisions, or
similar obligations of other states or their subdivisions. Subject to the same
regulated investment company and 50% requirements, such dividends are also
excluded from the net income base of the Ohio corporation franchise tax to the
extent such dividends are either excluded from gross income for federal income
tax purposes or are properly attributable to interest payments on Ohio
Obligations.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1994 of approximately
$279,400. No capital gains distribution is expected to be paid to shareholders
until net gains have been realized in excess of such carryforward. Dividends
paid by the Series with respect to each class of shares, to the extent any
dividends are paid, will be calculated in the same manner, at the same time, on
the same day and will be in the same amount except that each such class will
bear its own distribution charges, generally resulting in lower dividends for
the Class B and Class C shares. Distributions of net capital gains, if any, will
be paid in the same amount for each class of shares. See "How the Fund Values
its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS
19
<PAGE>
AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential
Mutual Fund Services, Inc., Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Arizona Series, Connecticut Money Market Series, Florida Series, Georgia Series,
Hawaii Income Series, Maryland Series, Massachusetts Series, Massachusetts Money
Market Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey
Money Market Series, New York Income Series (not presently being offered), New
York Series, New York Money Market Series, North Carolina Series, Ohio Series
and Pennsylvania Series. The Series is authorized to issue an unlimited number
of shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL
20
<PAGE>
A MEETING UPON A VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF
VOTING ON THE REMOVAL OF ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
21
<PAGE>
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------------- --------------------------- -------------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of the .30 of 1% (currently being Initial sales charge waived or reduced for
public offering price charged at a rate of .10 of certain purchases
1%)
CLASS B Maximum contingent deferred sales charge or .50 of 1% Shares convert to Class A shares
CDSC of 5% of the lesser of the amount approximately seven years after purchase
invested or the redemption proceeds;
declines to zero after six years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being charged Shares do not convert to another class
amount invested or the redemption proceeds at a rate of
on redemptions made within one year of .75 of 1%)
purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
22
<PAGE>
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ---------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
23
<PAGE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares -- Reduction and Waiver of Initial Sales Charges -- Class A Shares" in
the Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
24
<PAGE>
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares" If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
25
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ----------------------------------------------------------------------------------- -----------------------
<S> <C>
First.............................................................................. 5.0%
Second............................................................................. 4.0%
Third.............................................................................. 3.0%
Fourth............................................................................. 2.0%
Fifth.............................................................................. 1.0%
Sixth.............................................................................. 1.0%
Seventh............................................................................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of
26
<PAGE>
the grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), at the time of death or initial determination of disability,
provided that the shares were purchased prior to death or disability. In
addition, the CDSC will be waived on redemptions of shares held by a Trustee of
the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased to $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of
27
<PAGE>
such shares. The conversion feature described above will not be implemented and,
consequently, the first conversion of Class B shares will not occur before
February 1995, but as soon thereafter as practicable. At that time all amounts
representing Class B shares then outstanding beyond the applicable conversion
period will automatically convert to Class A shares together with all shares or
amounts representing Class B shares acquired through the automatic reinvestment
of dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES , THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
28
<PAGE>
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distribtutions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................ 2
Risk Factors and Special Characteristics..... 2
FUND EXPENSES.................................. 4
FINANCIAL HIGHLIGHTS........................... 5
HOW THE FUND INVESTS........................... 8
Investment Objective and Policies............ 8
Other Investments and Policies............... 12
Investment Restrictions...................... 13
HOW THE FUND IS MANAGED........................ 13
Manager...................................... 13
Distributor.................................. 14
Portfolio Transactions....................... 16
Custodian and Transfer and Dividend
Disbursing Agent............................ 16
HOW THE FUND VALUES ITS SHARES................. 16
HOW THE FUND CALCULATES PERFORMANCE............ 17
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 18
GENERAL INFORMATION............................ 20
Description of Shares........................ 20
Additional Information....................... 21
SHAREHOLDER GUIDE.............................. 21
How to Buy Shares of the Fund................ 21
Alternative Purchase Plan.................... 22
How to Sell Your Shares...................... 24
Conversion Feature--Class B Shares........... 27
How to Exchange Your Shares.................. 28
Shareholder Services......................... 29
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
</TABLE>
- -------------------------------------------
MF 123A 44404FM
Class A: 74435M-83-8
CUSIP Nos.: Class B: 74435M-84-6
Class C: 74435M-49-9
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(OHIO SERIES)
- --------------------------------------
[LOGO]
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
Prudential Municipal Series Fund
(Pennsylvania Series)
- ----------------------------------------------------------------------
PROSPECTUS DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Pennsylvania Series)
(the "Series") is one of seventeen series of an open-end, management investment
company, or mutual fund. This Series is diversified and is designed to provide
the maximum amount of income that is exempt from Pennsylvania personal income
tax and federal income tax consistent with the preservation of capital and, in
conjunction therewith, the Series may invest in debt securities with the
potential for capital gain. The net assets of the Series are invested in
obligations within the four highest ratings of either Moody's Investors Service
or Standard & Poor's Ratings Group or in unrated obligations which, in the
opinion of the Fund's investment adviser, are of comparable quality. There can
be no assurance that the Series' investment objective will be achieved. See "How
the Fund Invests--Investment Objective and Policies." The Fund's address is One
Seaport Plaza, New York, New York 10292, and its telephone number is (800)
225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Pennsylvania Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated December 30,
1994, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered in
seventeen series, each of which operates as a separate fund. A mutual fund pools
the resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, management
investment company. Only the Pennsylvania Series is offered through this
Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is exempt
from Commonwealth of Pennsylvania personal income tax and federal income tax
consistent with the preservation of capital. It seeks to achieve this objective
by investing primarily in Pennsylvania municipal and local government
obligations and obligations of other qualifying issuers, such as issuers located
in Puerto Rico, the Virgin Islands and Guam, which pay income exempt, in the
opinion of counsel, from Commonwealth of Pennsylvania personal income tax and
federal income tax (Pennsylvania Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 8.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Pennsylvania Obligations. This
degree of investment concentration makes the Series particularly susceptible to
factors adversely affecting issuers of Pennsylvania Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at page
12. To hedge against changes in interest rates, the Series may also purchase put
options and engage in transactions involving derivatives, including financial
futures contracts and options thereon. See "How the Fund Invests-- Investment
Objective and Policies--Futures Contracts and Options Thereon" at page 10.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager of
the Fund and is compensated for its services at an annual rate of .50 of 1% of
the Series' average daily net assets. As of September 30, 1994, PMF served as
manager or administrator to 68 investment companies, including 38 mutual funds,
with aggregate assets of approximately $47 billion. The Prudential Investment
Corporation (PIC or the Subadviser) furnishes investment advisory services in
connection with the management of the Fund under a Subadvisory Agreement with
PMF. See "How the Fund is Managed--Manager" at page 13.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Series' Class A shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .10 of 1% of the average daily
net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily net
assets of the Class B shares and is paid an annual distribution and service fee
which is currently being charged at the rate of .75 of 1% of the average daily
net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 14.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000 per
class and $5,000 for Class C shares. The minimum subsequent investment is $100
for all classes. There is no minimum investment requirement for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Guide--How to Buy Shares of the Fund" at page 21 and "Shareholder Guide--
Shareholder Services" at page 28.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), at
the net asset value per share (NAV) next determined after receipt of your
purchase order by the Transfer Agent or Prudential Securities plus a sales
charge which may be imposed either (i) at the time of purchase (Class A shares)
or (ii) on a deferred basis (Class B or Class C shares). See "How the Fund
Values its Shares" at page 16 and "Shareholder Guide--How to Buy Shares of the
Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
-Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
-Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A
shares, Class B shares will automatically convert
to Class A shares (which are subject to lower
ongoing distribution-related expenses)
approximately seven years after purchase.
-Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing
distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 24.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Series at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 17.
3
<PAGE>
FUND EXPENSES
(PENNSYLVANIA SERIES)
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES+ CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------------- --------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)................ 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends.............. None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the first 1% on redemptions
year, decreasing by made within one year
1% annually to 1% in of purchase
the fifth and sixth
years and 0% the
seventh year*
Redemption Fees............................... None None None
Exchange Fee.................................. None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets) CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------------- --------------------
<S> <C> <C> <C>
Management Fees............................... .50% .50% .50%
12b-1 Fees.................................... .10++ .50 .75++
Other Expenses................................ .15 .15 .15
-- ------
---
Total Fund Operating Expenses................. .75% 1.15% 1.40%
-- ------
-- ------
---
---
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A........................................ $37 $53 $70 $120
Class B........................................ $62 $67 $73 $123
Class C........................................ $24 $44 $77 $168
You would pay the following expenses on the same
investment, assuming no redemption:
Class A........................................ $37 $53 $70 $120
Class B........................................ $12 $37 $63 $123
Class C........................................ $14 $44 $77 $168
The above example with respect to Class A and Class B shares is based on data
for the Series' fiscal year ended August 31, 1994. The above example with
respect to Class C shares is based on expenses expected to have been incurred if
Class C shares had been in existence during the entire fiscal year ended August
31, 1994. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Series will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund is Managed." "Other Expenses" includes operating expenses of
the Series, such as Trustees' and professional fees, registration fees, reports
to shareholders and transfer agency and custodian fees.
<FN>
- ---------------
* Class B shares will automatically convert to Class A shares approximately seven years after purchase. See
"Shareholder Guide--Conversion Feature--Class B Shares."
+ Pursuant to rules of the National Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares of the Series may not exceed 6.25%
of total gross sales, subject to certain exclusions. This 6.25% limitation is imposed on each class of the
Series rather than on a per shareholder basis. Therefore, long-term shareholders of the Series may pay
more in total sales charges than the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that the Fund may pay a
distribution fee of up to .30 of 1% and 1% per annum of the average daily net assets of the Class A and
Class C shares, respectively, the Distributor has agreed to limit its distribution fees with respect to
the Class A and Class C shares of the Series to no more than .10 of 1% and .75 of 1% of the average daily
net asset value of the Class A shares and Class C shares, respectively, for the fiscal year ending August
31, 1995. Total Fund Operating Expenses of the Class A and Class C shares without such limitations would
be .95% and 1.65%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
JANUARY 22,
1990*
YEAR ENDED AUGUST 31, THROUGH
----------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 11.21 $ 10.55 $ 9.96 $ 9.60 $ 9.83
-------- -------- -------- -------- -----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .59 .62 .62 .62+ .38+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.68) .70 .59 .39 (.23)
-------- -------- -------- -------- -----------
Total from
investment
operations..... (.09) 1.32 1.21 1.01 .15
-------- -------- -------- -------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.59) (.62) (.62) (.62) (.38)
Distributions from
net realized
gains.............. (.11) (.04) -- (.03) --
-------- -------- -------- -------- -----------
Total
distributions... (.70) (.66) (.62) (.65) (.38)
-------- -------- -------- -------- -----------
Net asset value, end
of period.......... $ 10.42 $ 11.21 $ 10.55 $ 9.96 $ 9.60
-------- -------- -------- -------- -----------
-------- -------- -------- -------- -----------
TOTAL RETURN++:..... (.82)% 12.86% 12.44% 10.82% 1.43%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $ 10,651 $ 9,342 $ 5,908 $ 3,521 $ 1,823
Average net assets
(000).............. $ 10,315 $ 7,354 $ 4,439 $ 2,366 $ 977
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. .75% .78% .81% .83% .78%**+
Expenses,
excluding
distribution
fee.............. .65% .68% .71% .74% .68%**+
Net investment
income........... 5.52% 5.69% 5.99% 6.32% 6.51%**+
Portfolio
turnover........... 22% 13% 25% 62% 37%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
+ Net of expense subsidy/management fee waiver.
++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1994, have been audited by Deloitte & Touche LLP, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------
APRIL 3,
1987*
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------------------------------------------- AUGUST 31,
1994 1993 1992 1991 1990 1989++ 1988 1987
--------- --------- --------- --------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............. $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47 $ 9.73 $ 10.00
--------- --------- --------- --------- --------- --------- ---------- ------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .55 .57 .58 .58+ .61+ .65+ .67+ .26+
Net realized and
unrealized gain
(loss) on
investment
transactions....... (.68) .71 .58 .39 (.21) .34 (.26) (.27)
--------- --------- --------- --------- --------- --------- ---------- ------------
Total from
investment
operations..... (.13) 1.28 1.16 .97 .40 .99 .41 (.01)
--------- --------- --------- --------- --------- --------- ---------- ------------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.55) (.57) (.58) (.58) (.61) (.65) (.67) (.26)
Distributions from
net realized
gains.............. (.11) (.04) -- (.03) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------- ------------
Total
distributions... (.66) (.61) (.58) (.61) (.61) (.65) (.67) (.26)
--------- --------- --------- --------- --------- --------- ---------- ------------
Net asset value, end
of period.......... $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47 $ 9.73
--------- --------- --------- --------- --------- --------- ---------- ------------
--------- --------- --------- --------- --------- --------- ---------- ------------
TOTAL RETURN+++:.... (1.22)% 12.54% 11.92% 10.39% 4.08% 10.75% 4.53% (0.15)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)....... $ 257,732 $ 263,752 $ 206,028 $ 170,162 $ 150,824 $ 118,280 $ 52,503 $16,340
Average net assets
(000).............. $ 266,594 $ 229,955 $ 186,113 $ 146,591 $ 141,183 $ 86,496 $ 35,700 $ 4,403
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.15% 1.18% 1.21% 1.23%+ 1.02%+ .77%+ .53%+ 0%**+
Expenses,
excluding
distribution
fee.............. .65% .68% .71% .74%+ .53%+ .29%+ .06%+ 0%**+
Net investment
income........... 5.11% 5.29% 5.59% 5.94%+ 6.05%+ 6.27%+ 6.66%+ 5.54%**+
Portfolio
turnover........... 22% 13% 25% 62% 37% 11% 137% 42%
<FN>
- ---------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
6
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout the indicated
period)
(Class C Shares)
The following financial highlights have been audited by Deloitte & Touche LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class C share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. This information is based on data
contained in the financial statements.
<TABLE>
<CAPTION>
CLASS C
----------
AUGUST 1,
1994*
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+:.................................... .14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 90
Average net assets (000).......................... $ 1
Ratios to average net assets:#
Expenses, including distribution fee............ 2.00%**
Expenses, excluding distribution fee............ 1.25%**
Net investment income........................... 8.51%**
Portfolio turnover................................ 22%
<FN>
- ---------------
* Commencement of offering of Class C shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends and
distributions. Total return is not annualized.
# Because of the event referred to in * and the timing of such, the ratios for
the Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
</TABLE>
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF SEVENTEEN SEPARATE SERIES.
EACH OF THESE SERIES IS MANAGED INDEPENDENTLY. THE PENNSYLVANIA SERIES (THE
SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM COMMONWEALTH OF PENNSYLVANIA PERSONAL INCOME TAX AND
FEDERAL INCOME TAX CONSISTENT WITH THE PRESERVATION OF CAPITAL AND, IN
CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE
POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives and Policies" in the
Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN PENNSYLVANIA, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS OR GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM COMMONWEALTH OF PENNSYLVANIA PERSONAL
INCOME TAX AND FEDERAL INCOME TAX (PENNSYLVANIA OBLIGATIONS). THERE CAN BE NO
ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Pennsylvania law, dividends paid by the Series are exempt
from Pennsylvania personal income tax for resident individuals to the extent
they are derived from interest payments on Pennsylvania Obligations.
Pennsylvania Obligations could include general obligation bonds of the
Commonwealth, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL PENNSYLVANIA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT
GRADE" SECURITIES. In other words, all of the Pennsylvania Obligations will, at
the time of purchase, be rated within the four highest quality grades as
determined by either Moody's Investors Service (Moody's) (currently Aaa, Aa, A,
Baa for bonds, MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial
paper) or Standard & Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for
bonds, SP-1, SP-2 for notes and A-1 for commercial paper) or, if unrated, will
possess creditworthiness, in the opinion of the investment adviser, comparable
to securities in which the Series may invest. Securities rated Baa or BBB may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase Pennsylvania Obligations
which, in the opinion of the investment adviser, offer the opportunity for
capital appreciation. This may occur, for example, when the investment adviser
believes that the issuer of a particular Pennsylvania Obligation might receive
an upgraded credit standing, thereby increasing the market value of the bonds it
has issued or when the investment adviser believes that interest rates might
decline. As a general matter, bond prices and the Series' net asset value will
vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN PENNSYLVANIA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
Pennsylvania and federal income taxes or the Series will have at least 80% of
its total assets invested in Pennsylvania Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes, or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position or when there is a scarcity of bonds exempt from
Pennsylvania tax, the Series may invest more than 20% of the value of its assets
in debt securities other than Pennsylvania Obligations or may invest its assets
so that more than 20% of the income is subject to Pennsylvania or federal income
taxes. The Series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
9
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying securities. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON PENNSYLVANIA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Pennsylvania Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
10
<PAGE>
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the
11
<PAGE>
correlation may be affected by additions to or deletions from the index which
serves as the basis for a futures contract. Finally, if the price of the
security that is subject to the hedge were to move in a favorable direction, the
advantage to the Series would be partially offset by the loss incurred on the
futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN PENNSYLVANIA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
PENNSYLVANIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF PENNSYLVANIA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL
FUND THAT IS NOT CONCENTRATED IN THESE ISSUERS TO THIS DEGREE. The Commonwealth
of Pennsylvania has not been immune to the problems of the Northeast as the
recent national recession reduced tax revenue growth contributing to budget
shortfalls and reduced cash balances. Financial operations improved in fiscal
1992 with the help of large tax increases and tax base broadening measures and
numerous cost reduction measures implemented throughout the year. Pennsylvania
focused on expenditure reduction in fiscal year 1993 as appropriations (less
lapses) represented a 1.1% increase over fiscal 1992 appropriations. For fiscal
1994, spending increased significantly funded, in part, by utilization of the
prior year surplus and through a 3.9% growth in revenue. The fiscal 1995 budget,
which includes some tax reductions, provides for an increase in spending of
3.9%. If either Pennsylvania or any of its local government entities is unable
to meet its financial obligations, the income derived by the Series, the ability
to preserve or realize appreciation of the Series' capital and the Series'
liquidity could be adversely affected.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
12
<PAGE>
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The investment
adviser will monitor the liquidity of such restricted securities under the
supervision of the Trustees. See "Investment Objectives and Policies--Illiquid
Securities" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1994, total expenses of the Series as a
percentage of average net assets were .75%, 1.15% and 2.00% (annualized) for the
Series' Class A, Class B and Class C shares, respectively. See "Financial
Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1994, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of September 30, 1994, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 30 closed-end investment companies with aggregate assets of
approximately $47 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
The current portfolio manager of the Series is Carla Wrocklage, a Vice
President of Prudential Investment Advisors. Ms. Wrocklage has responsibility
for the day-to-day management of the portfolio. Ms. Wrocklage has managed the
portfolio since November 1991 and has been employed by PIC as a portfolio
manager since 1990. Prior thereto, she was employed as an analyst by Keystone
Group since 1986.
13
<PAGE>
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated
broker-dealer, commissions and account servicing fees paid to, or on account of,
other broker-dealers or financial institutions (other than national banks) which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of Prudential Securities and Prusec associated with the sale
of Series shares, including lease, utility, communications and sales promotion
expenses. The State of Texas requires that shares of the Series may be sold in
that state only by dealers or financial institutions which are registered as
broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE OF UP TO .30 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE SERIES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. PMFD has agreed to limit its distribution-related
fees payable under the Class A Plan to .10 of 1% of the average daily net asset
value of the Class A shares for the fiscal year ending August 31, 1995.
For the fiscal year ended August 31, 1994, PMFD received payments of $10,315
under the Class A Plan. This amount was primarily expended for payment of
account servicing fees to financial advisers and other persons who sell Class A
shares. For the fiscal year ended August 31, 1994, PMFD also received
approximately $126,400 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
14
<PAGE>
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1995. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1994, Prudential Securities incurred
distribution expenses of approximately $2,103,700 under the Class B Plan and
received $1,332,972 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $365,000 in contingent deferred
sales charges from redemptions of Class B shares during this period.
For the fiscal year ended August 31, 1994, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% (annualized) of the average daily
net assets of the Class A, Class B and Class C shares, respectively. The Series
records all payments made under the Plans as expenses in the calculation of net
investment income. Prior to August 1, 1994, the Class A and Class B Plans
operated as "reimbursement type" plans and, in the case of Class B, provided for
the reimbursement of distribution expenses incurred in current and prior years.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. 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.
15
<PAGE>
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
16
<PAGE>
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the Series. The "total return" shows how much an
investment in the Series would have increased (decreased) over a specified
period of time (I.E., one, five or ten years or since inception of the Series)
assuming that all distributions and dividends by the Series were reinvested on
the reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. The Fund will include
performance data for each class of shares of the Series in any advertisement or
information including performance data of the Series. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market"
17
<PAGE>
for federal income tax purposes; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on these "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. See
"Distributions and Tax Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service. Shareholders should consult their own tax advisers regarding
the taxability of such conversions and exchanges for State and local tax
purposes.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
18
<PAGE>
Under Pennsylvania law, dividends paid by the Series are exempt from
Pennsylvania income tax for individuals who are subject to Pennsylvania personal
income tax to the extent such dividends are derived from interest payments on
Pennsylvania Obligations.
Dividends paid by the Series are also exempt from the Philadelphia School
District investment net income tax for individuals who are residents of the City
of Philadelphia to the extent such dividends are derived from interest payments
on Pennsylvania Obligations or to the extent such dividends are designated as
capital gain dividends for federal income tax purposes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series will elect to treat net
capital losses of approximately $1,202,900 incurred in the ten month period
ended August 31, 1994 as having been incurred in the following fiscal year.
Dividends paid by the Series with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount except that each class will bear
its own distribution charges, generally resulting in lower dividends for the
Class B and Class C shares. Distributions of net capital gains, if any, will be
paid in the same amount for each class of shares. See "How the Fund Values its
Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full
19
<PAGE>
and fractional shares in separate series, currently designated as the Arizona
Series, Connecticut Money Market Series, Florida Series, Georgia Series, Hawaii
Income Series, Maryland Series, Massachusetts Series, Massachusetts Money Market
Series, Michigan Series, Minnesota Series, New Jersey Series, New Jersey Money
Market Series, New York Income Series (not presently being offered), New York
Series, New York Money Market Series, North Carolina Series, Ohio Series and
Pennsylvania Series. The Series is authorized to issue an unlimited number of
shares, divided into three classes, designated Class A, Class B and Class C.
Each class of shares represents an interest in the same assets of the Series and
is identical in all respects except that (i) each class bears different
distribution expenses, (ii) each class has exclusive voting rights with respect
to its distribution and service plan (except that the Fund has agreed with the
SEC in connection with the offering of a conversion feature on Class B shares to
submit any amendment of the Class A Plan to both Class A and Class B
shareholders), (iii) each class has a different exchange privilege and (iv) only
Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently, the Series is
offering three classes, designated Class A, Class B and Class C shares. In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
20
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. The minimum initial investment
requirement is waived for purchases of Class A shares effected through an
exchange of Class B shares of The BlackRock Government Income Trust. See
"Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
21
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% the lesser of the 1% (currently being Shares do not convert to another class
amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
22
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50%
$250,000 to $499,999 1.50 1.52 1.50%
$500,000 to $999,999 1.00 1.01 1.00%
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
Class A shares may be purchased at NAV, through Prudential Securities or the
Transfer Agent, by the following persons: (a) Trustees and officers of the Fund
and other Prudential Mutual Funds, (b) employees of Prudential Securities and
PMF and their subsidiaries and members of the families of such persons who
maintain an "employee related" account at Prudential Securities or the Transfer
Agent, (c) employees and special agents of Prudential and its subsidiaries and
all persons who have retired directly from active service with Prudential or one
of its subsidiaries, (d) registered representatives and employees of dealers who
have entered into a selected dealer agreement with Prudential Securities
provided that purchases at NAV are permitted by such person's employer and (e)
investors who have a business relationship with a financial adviser who joined
Prudential Securities from another investment firm, provided that (i) the
purchase is made within 90 days of the commencement of the financial adviser's
employment at Prudential Securities, (ii) the purchase is made with proceeds of
a redemption of shares of any open-end, non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) on which no deferred sales
load, fee or other charge was imposed on redemption and (iii) the financial
adviser served as the client's broker on the previous purchases.
23
<PAGE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares acquired upon the reinvestment of dividends and distributions.
See "Purchase and Redemption of Fund Shares--Reduction and Waiver of Initial
Sales Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
24
<PAGE>
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B or Class C shares. You must notify the Fund's Transfer
Agent, either directly or through Prudential Securities or Prusec, at the time
the repurchase privilege is exercised that you are entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
25
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------------ ----------------------
<S> <C>
First............................................................. 5.0%
Second............................................................ 4.0%
Third............................................................. 3.0%
Fourth............................................................ 2.0%
Fifth............................................................. 1.0%
Sixth............................................................. 1.0%
Seventh........................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased on or prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. It is currently anticipated that
conversions will occur during the months of February, May, August and November
commencing in or about February 1995. Conversions will be effected at relative
net asset value without the imposition of any additional sales charge.
26
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. The
conversion feature described above will not be implemented and, consequently,
the first conversion of Class B shares will not occur before February 1995, but
as soon thereafter as practicable. At that time all amounts representing Class B
shares then outstanding beyond the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the
27
<PAGE>
redemption of shares exchanged will be calculated from the first day of the
month after the initial purchase, excluding the time shares were held in a money
market fund. Class B and Class C shares may not be exchanged into money market
funds other than Prudential Special Money Market Fund. For purposes of
calculating the holding period applicable to the Class B conversion feature, the
time period during which Class B shares were held in a money market fund will be
excluded. See "Conversion Feature--Class B Shares" above. An exchange will be
treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. Commencing in or about February 1995, a special
exchange privilege is available for shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares on a quarterly basis, unless the shareholder elects otherwise. It is
currently anticipated that this exchange will occur quarterly in February, May,
August and November. Eligibility for this exchange privilege will be calculated
on the business day prior to the date of the exchange. Amounts representing
Class B or Class C shares which are not subject to a CDSC include the following:
(1) amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
28
<PAGE>
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
29
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
-TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
-TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
-COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
-INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
Risk Factors and Special Characteristics...... 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 12
Investment Restrictions....................... 13
HOW THE FUND IS MANAGED......................... 13
Manager....................................... 13
Distributor................................... 14
Portfolio Transactions........................ 16
Custodian and Transfer and Dividend Disbursing
Agent........................................ 16
HOW THE FUND VALUES ITS SHARES.................. 16
HOW THE FUND CALCULATES PERFORMANCE............. 17
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 17
GENERAL INFORMATION............................. 19
Description of Shares......................... 19
Additional Information........................ 20
SHAREHOLDER GUIDE............................... 21
How to Buy Shares of the Fund................. 21
Alternative Purchase Plan..................... 22
How to Sell Your Shares....................... 24
Conversion Feature--Class B Shares............ 26
How to Exchange Your Shares................... 27
Shareholder Services.......................... 28
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF132A 4440349
Class A: 74435M-87-9
CUSIP Nos.: Class B: 74435M-88-7
Class C: 74435M-48-1
PROSPECTUS
DECEMBER 30,
1994
PRUDENTIAL
MUNICIPAL
SERIES FUND
(PENNSYLVANIA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
- ------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 30, 1994
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company, or mutual fund, consisting of seventeen series--the Arizona
Series, the Connecticut Money Market Series, the Florida Series, the Georgia
Series, the Hawaii Income Series, the Maryland Series, the Massachusetts Series,
the Massachusetts Money Market Series, the Michigan Series, the Minnesota
Series, the New Jersey Series, the New Jersey Money Market Series, the New York
Series, the New York Money Market Series, the North Carolina Series, the Ohio
Series and the Pennsylvania Series. An eighteenth series, the New York Income
Series, is not currently being offered. The objective of each series, other than
the Connecticut Money Market Series, the Massachusetts Money Market Series, the
New Jersey Money Market Series and the New York Money Market Series
(collectively, the money market series), is to seek to provide to shareholders
who are residents of the respective state the maximum amount of income that is
exempt from federal and applicable state income taxes and, in the case of the
New York Series and the New York Income Series, also New York City income taxes,
consistent with the preservation of capital, and, in conjunction therewith, the
series may invest in debt securities with the potential for capital gain. The
objective of the money market series is to seek to provide the highest level of
current income that is exempt from federal and applicable state income taxes
and, in the case of the New York Money Market Series, also New York City income
taxes, consistent with liquidity and the preservation of capital. All of the
series are diversified except the Florida Series, the Hawaii Income Series, the
New York Income Series, and the money market series, other than the New York
Money Market Series. There can be no assurance that any series' investment
objective will be achieved. 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 December
30, 1994 (September 19, 1994 for the Hawaii Income Series), copies of which may
be obtained from the Fund upon request.
- --------------------------------------------------------------------------------
117B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
-----------------------------------------------------------------------------------------
CONNECTICUT MASSACHUSETTS
MONEY HAWAII MONEY
PAGE ARIZONA MARKET FLORIDA GEORGIA INCOME MARYLAND MASSACHUSETTS MARKET MICHIGAN
---- ------- ----------- ------- ------- ------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Information........... B-1 20 15 21 20 15 19 19 15 19
Investment Objectives and
Policies..................... B-1 8 6 8 8 5 8 8 6 8
In General.................. B-1 -- -- -- -- -- -- -- --
Tax-Exempt Securities....... B-3 8 6 8 8 5 8 8 7 8
Risks of Investing in
Defaulted Securities....... B-5 -- -- -- -- 6 -- -- -- --
Special Considerations
Regarding Investments in
Tax-Exempt Securities...... B-5 12 9 12 12 9 12 12 9 12
Floating Rate and Variable
Rate Securities............ B-15 8 7 8 8 5 8 8 7 8
Put Options................. B-16 10 8 10 9 6 10 10 8 10
Financial Futures Contracts
and Options Thereon........ B-16 11 -- 11 10 8 10 10 -- 10
When-Issued and Delayed
Delivery Securities........ B-18 10 8 10 10 7 10 10 8 10
Portfolio Turnover.......... B-19 13 -- 13 12 10 12 12 -- 12
Illiquid Securities......... B-20 13 10 13 12 10 12 12 10 13
Repurchase Agreements....... B-20 12 9 12 12 9 12 12 9 12
Investment Restrictions....... B-21 13 10 13 13 10 13 13 10 13
Trustees and Officers......... B-22 13 10 13 13 10 13 13 10 13
Manager....................... B-28 13 10 13 13 10 13 13 10 13
Distributor................... B-31 14 11 14 14 11 14 14 11 14
Portfolio Transactions and
Brokerage.................... B-36 16 12 16 16 12 16 16 12 16
Purchase and Redemption of
Fund Shares.................. B-37 21 16 21 21 16 21 21 16 21
Specimen Price Make-Up...... B-38 -- -- -- -- -- -- -- --
Reduction and Waiver of
Initial Sales
Charges--Class A Shares.... B-38 24 -- 24 23 19 23 23 -- 23
Waiver of the Contingent
Deferred Sales Charge--
Class B Shares............. B-40 27 -- 27 26 22 26 26 -- 26
Quantity Discount--Class B
Shares Purchased Prior to
August 1, 1994............. B-40 27 -- -- 26 26 26 -- 26
Shareholder Investment
Account...................... B-40 30 23 30 29 24 28 29 22 28
Automatic Reinvestment of
Dividends and/or
Distributions.............. B-41 30 23 30 29 24 29 29 22 28
Exchange Privilege.......... B-41 29 22 29 28 24 27 27 21 27
Dollar Cost Averaging....... B-42 -- -- -- -- -- -- -- --
Automatic Savings
Accumulation Plan (ASAP)... B-43 30 23 30 29 24 29 29 22 29
Systematic Withdrawal
Plan....................... B-43 30 23 30 29 24 29 29 22 29
How to Redeem Shares of the
Money Market Series........ B-43 -- 20 -- -- -- -- -- 19 --
Net Asset Value............... B-44 17 13 17 16 12 16 16 13 16
Performance Information....... B-45 17 6 17 17 13 17 17 6 17
Distributions and Tax
Information.................. B-49 18 13 18 17 13 17 17 13 17
Distributions............... B-49 19 15 20 19 15 19 19 14 19
Federal Taxation............ B-50 18 13 18 17 13 17 17 13 17
State Taxation.............. B-52 19 14 19 19 14 19 18 14 19
Organization and
Capitalization............... B-60 20 15 21 20 15 19 19 15 19
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants...... B-61 16 13 17 16 12 16 16 12 16
Description of Tax-Exempt
Security Ratings............. B-62 -- -- -- -- A-1 -- -- -- --
Financial Statements.......... B-64 5 5 5 5 -- 5 5 5 5
</TABLE>
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
---------------------------------------------------------------------------------
NEW JERSEY NEW YORK
NEW MONEY NEW YORK MONEY NORTH
PAGE MINNESOTA JERSEY MARKET NEW YORK INCOME MARKET CAROLINA OHIO PENNSYLVANIA
---- --------- ------ ---------- -------- -------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Information..................... B-1 19 20 15 20 16 14 20 20 19
Investment Objectives and Policies...... B-1 8 8 6 8 5 6 8 8 8
In General............................ B-1 -- -- -- -- -- -- -- -- --
Tax-Exempt Securities................. B-3 8 8 6 8 5 6 8 8 8
Risks of Investing in Defaulted
Securities........................... B-5 -- -- -- -- -- -- -- -- --
Special Considerations Regarding
Investments in Tax-Exempt
Securities........................... B-5 12 12 9 12 9 8 12 12 12
Floating Rate and Variable Rate
Securities........................... B-15 8 8 7 8 5 7 8 8 8
Put Options........................... B-16 10 10 8 9 6 8 10 10 10
Financial Futures Contracts and
Options Thereon...................... B-16 11 11 -- 10 8 -- 11 11 10
When-Issued and Delayed Delivery
Securities........................... B-18 10 10 8 10 7 8 10 10 10
Portfolio Turnover.................... B-19 12 13 -- 12 10 -- 12 12 12
Illiquid Securities................... B-20 13 13 10 12 10 9 13 13 13
Repurchase Agreements................. B-20 12 12 9 12 9 9 12 12 12
Investment Restrictions................. B-21 13 13 10 13 10 9 13 13 13
Trustees and Officers................... B-22 13 13 10 13 10 9 13 13 13
Manager................................. B-28 13 13 10 13 10 9 13 13 13
Distributor............................. B-31 14 14 11 14 11 10 14 14 14
Portfolio Transactions and Brokerage.... B-36 16 16 12 16 12 11 16 16 16
Purchase and Redemption of Fund
Shares................................. B-37 21 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 24 -- 23 18 -- 22 24 23
Waiver of the Contingent Deferred
Sales Charge-- Class B Shares........ B-40 26 26 -- 26 -- -- 26 26 26
Quantity Discount--Class B Shares
Purchased Prior to August 1, 1994.... B-40 26 27 -- 26 -- -- 26 27 26
Shareholder Investment Account.......... B-40 29 29 23 29 21 21 28 29 28
Automatic Reinvestment of Dividends
and/or Distributions................. B-41 29 29 23 29 21 21 28 29 28
Exchange Privilege.................... B-41 28 28 22 28 20 20 27 28 27
Dollar Cost Averaging................. B-42 -- -- -- -- -- -- -- -- --
Automatic Savings Accumulation Plan
(ASAP)............................... B-43 29 29 23 29 21 21 29 29 29
Systematic Withdrawal Plan............ B-43 29 29 23 29 21 21 29 29 29
How to Redeem Shares of the Money
Market Series........................ B-43 -- -- 20 -- -- 18 -- -- --
Net Asset Value......................... B-44 16 17 13 16 13 12 16 16 16
Performance Information................. B-45 17 17 6 17 13 6 17 17 17
Distributions and Tax Information....... B-49 17 18 14 17 14 12 17 18 17
Distributions......................... B-49 19 19 15 19 15 13 19 19 19
Federal Taxation...................... B-50 17 18 14 17 14 12 17 18 17
State Taxation........................ B-52 18 19 14 19 15 13 19 19 18
Organization and Capitalization......... B-60 19 20 15 20 16 14 20 20 19
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants............................ B-61 16 16 13 16 13 12 16 16 16
Description of Tax-Exempt Security
Ratings................................ B-62 -- -- -- -- -- -- -- --
Financial Statements.................... B-64 5 5 5 5 -- 5 5 5 5
</TABLE>
<PAGE>
GENERAL INFORMATION
The Fund was organized on May 18, 1984. On February 28, 1991, the Trustees
approved an amendment to the Declaration of Trust to change the Fund's name from
Prudential-Bache Municipal Series Fund to Prudential Municipal Series Fund.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company consisting of seventeen separate series: the Arizona Series,
the Connecticut Money Market Series, the Florida Series, the Georgia Series, the
Hawaii Income Series, the Maryland Series, the Massachusetts Series, the
Massachusetts Money Market Series, the Michigan Series, the Minnesota Series,
the New Jersey Series, the New Jersey Money Market Series, the New York Series,
the New York Money Market Series, the North Carolina Series, the Ohio Series and
the Pennsylvania Series. An eighteenth series, the New York Income Series, is
not currently being offered. 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 Hawaii Income Series may invest up to 30% of its total assets in Hawaii
Obligations rated below Baa by Moody's or below BBB by S&P or if non-rated, of
comparable quality, in the opinion of the Fund's investment adviser, based on
its credit analysis. The New York Income Series may invest up to 30% of its
total assets in New York Obligations rated below Baa by Moody's or below BBB by
S&P or if non-rated, of comparable quality, in the opinion of the Fund's
investment adviser, based on its credit analysis. The Hawaii Income Series may
invest up to 5% of its total assets in Hawaii Obligations which are in default
in the payment of principal or interest. In addition, the New York Income Series
may invest up to 5% of its total assets in New York Obligations which are in
default in the payment of principal or interest. The money market series will
invest in securities which, at the time of purchase, have a remaining maturity
of thirteen months or less and are rated (or issued by an issuer that is rated
with respect to a class of short-term debt obligations, or any security within
that class, that is comparable in priority and security with the security) in
one of the two highest rating categories by at least two nationally recognized
statistical rating organizations assigning a rating to the security or issuer
(or, if only one such rating organization assigned a rating, by that rating
organization). Each series may invest in tax-exempt securities which are not
rated if, based upon a credit analysis by the investment adviser under the
supervision of the Trustees, the investment adviser believes that such
securities
B-1
<PAGE>
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 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
B-2
<PAGE>
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.
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.
B-3
<PAGE>
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guaranty may
be regarded as a separate security and treated as an issue of such guarantor.
TAX-EXEMPT BONDS. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, and gas and electric utilities.
Tax-exempt bonds also may be issued in connection with the refunding of
outstanding obligations, to obtain funds to lend to other public institutions,
or for general operating expenses.
The two principal classifications of tax-exempt bonds are "general
obligation" and "revenue". General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. The Internal Revenue Code restricts
the types of industrial 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.
B-4
<PAGE>
RISKS OF INVESTING IN DEFAULTED SECURITIES
The Hawaii Income Series and the New York Income Series may each invest up
to 5% of its total assets in Hawaii Obligations and in New York Obligations,
respectively, that are in default in the payment of principal or interest. There
are a number of risks associated with investments in defaulted securities. These
risks include investment in an already troubled issuer, the possible incurrence
of costs associated with indemnifying the trustee for pursuing remedies (which
amount could equal the principal amount of the securities purchased) and
possible legal and consulting fees incurred to pursue remedies.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN TAX-EXEMPT SECURITIES
The following is a discussion of the general factors that might influence
the ability of the issuers in the various states to repay principal and interest
when due on the obligations contained in the portfolio of each series. Such
information is derived from sources that are generally available to investors
and is believed to be accurate, but has not been independently verified and may
not be complete.
ARIZONA
Arizona has traditionally been one of the fastest growing states in the
nation since World War II, due in part to its favorable climate and its
affordable housing. However, in the late 1980's, the State's rapid growth was
sharply curtailed by an overbuilding of office space which led to a slower rate
of new construction and financial difficulties in the banking and savings and
loan industries. This was compounded by the slowdown in defense spending which
has adversely affected many defense-related electronics firms. The economy has
also seen a noticeable shift away from manufacturing toward services, evidenced
in part by the attraction of several major credit card processing centers. This
shift toward lower paying jobs has been partially responsible for the decline in
per capita income from 92% of the national average in 1986 to 87% in 1993. The
State's economy has begun to grow again, albeit at a slower pace than
experienced before the real estate bust. The State has had some success in
attracting the relocation of firms from California, where the regulatory and tax
environment are seen as less favorable.
The State's fiscal situation has improved in recent years. After
experiencing several years of budget shortfalls requiring mid-year adjustments,
the State had a budget surplus of $86 million for fiscal year 1992-93, and a
surplus of $210.6 million for fiscal year 1993-94. For fiscal year 1994-95, a
surplus of $58.4 million is projected. However, the 1994 Legislature enacted a
personal income tax reduction of approximately $107 million and various business
tax cuts that raised concerns that the State may be undercutting its tax base.
In addition, voter approval in November 1992 of Proposition 108, which requires
a two-thirds majority in both houses of the legislature to pass tax or fee
increases, has substantially constrained the State's ability to raise revenues.
Maricopa County, the State's most populous county, experienced a fiscal year
1993 deficit of $64.2 million, as compared to a total county budget of
approximately $1.2 billion. The county has proposed a three-year plan that
officials say will eliminate the deficit in two years while avoiding a tax
increase.
CONNECTICUT
Connecticut is a wealthy state which experienced very strong economic growth
throughout the mid to late 1980's. The State's personal income growth exceeded
that of the U.S. and its per capita income is the highest in the nation. The
rate of unemployment was also well below the national average during this
period. However, beginning in 1988, these trends began to reverse themselves as
the Northeast went into recession in advance of the rest of the nation. This was
precipitated largely by major reductions in defense spending and by weaknesses
in housing and office construction, banking and the insurance industry. As a
result, personal income growth has slowed considerably and unemployment has
risen significantly, although it has remained somewhat below the national
average.
These economic difficulties resulted in severe fiscal stress, culminating
with a General Fund deficit of $965 million at the close of fiscal year 1991 and
the subsequent issuance of a like amount of Economic Recovery Notes which are
being repaid over a five year period. In fiscal year 1992, the State took a
number of actions to raise revenues, reduce expenditures and establish a broader
revenue base aimed at reducing the volatility of its budgetary operations. Chief
among these were the implementation of a 4.5% personal income
B-5
<PAGE>
tax and the broadening of the sales tax base, which was coupled with a decrease
in the sales tax rate from 8% to 6%. The Corporation Business Tax has also been
decreased from 13.8% to 11.5% effective in 1993. These actions, along with
conservative revenue projections, allowed the State to achieve modest surpluses
for fiscal years 1992, 1993 and 1994, a portion of which will be used to retire
some of the outstanding Economic Recovery Notes.
In June of 1992 the Manufacturing Recovery Act of 1992, which is directed
primarily toward providing incentives to manufacturers, was enacted in
Connecticut. The legislation provides for credits for establishing new
manufacturing and increasing new employee training. In addition, property tax
exemptions and sales tax exemptions were expanded for certain purchases of
manufacturing machinery and production materials. In May 1993, the legislature
enacted a budget for the 1993-1995 biennium; it has since enacted further
legislation that affects revenue and spending estimates. The budget now provides
expenditures in fiscal 1994 of $7,690.1 million, up 3.4% from the prior year,
and $8,567.2 million in fiscal 1995, up 7.6%.
FLORIDA
In 1980, Florida ranked seventh among the fifty states with a population of
9.7 million people. The State has grown dramatically since then and, as of April
1, 1993, ranked fourth with an estimated population of 13.6 million, an increase
of approximately 44.7% since 1980. The service sector is Florida's largest
employment sector, presently accounting for 32.1% of total non-farm employment.
Manufacturing jobs in Florida are concentrated in the area of high-tech and
value-added sectors, such as electrical and electronic equipment, as well as
printing and publishing. Although the job creation rate for the State of Florida
since 1980 is over two times the rate for the nation, as a whole, since 1989 the
unemployment rate for the State has risen faster than the national average. The
average rate of unemployment for Florida since 1980 is 6.5%, while the national
average is 7.1%.
South Florida is particularly susceptible to international trade and
currency imbalances and to economic dislocations in Central and South America,
due to its geographical location and its involvement with foreign trade, tourism
and investment capital. The Central and northern portions of the State are
impacted by problems in the agricultural sector, particularly with regard to the
citrus and sugar industries. Short-term adverse economic conditions may be
created in these areas, and in the State as a whole, due to crop failures,
severe weather conditions or other agriculture-related problems. The State
economy also has historically been somewhat dependent on the tourism and
construction industries and is sensitive to trends in those sectors.
Under the State Constitution and applicable statutes, the State budget as a
whole, and each separate fund within the State budget, must be kept in balance
from currently available revenues during each State fiscal year. Estimated
General Revenue and Working Capital fund revenues of $13,582.7 million for
1993-1994 (excluding Hurricane Andrew related revenues and expenses) represent
an increase of 8.4% over revenues for 1992-1993. This amount reflects a transfer
of $190 million, out of an estimated $220 million in non-recurring revenue due
to Hurricane Andrew, to a hurricane relief trust fund. Estimated Revenue for
1994-1995 of $14,573.8 million represent an increase of 7.3% over 1993-1994.
This amount reflects a transfer of $159 million in non-recurring revenue due to
Hurricane Andrew, to a hurricane relief trust fund.
A joint resolution to amend the State Constitution has been adopted by the
Florida Legislature. The amendment, if approved by the voters of the State at
the November 1994 general election, would limit the amount of taxes, fees,
licenses and charges imposed by the Legislature and collected during any fiscal
year to the amount of revenues allowed for the prior fiscal year, plus an
adjustment for growth. The limit would be effective starting with fiscal year
1995-96.
Many factors including national, economic, social and environmental policies
and conditions, most of which are not within the control of the State or its
local units of government, could affect or could have an adverse impact on the
financial condition of the State.
GEORGIA
Georgia's economy is based on manufacturing (textiles, food products, paper
products, electronic equipment and aircraft), trade and a growing service
sector. Atlanta, with an increasingly service-oriented economy, is a trade,
service and transportation center for the southeast region and the focus of
economic growth in the
B-6
<PAGE>
State. In most other cities in Georgia, manufacturing predominates. The State's
economy was only mildly affected by the early 1980's recession and grew rapidly
for most of the decade, with employment and personal income growth in excess of
comparable national rates and, despite continued population growth, personal
income per capita has steadily gained relative to the nation, growing from 84.2%
relative to the nation in 1980 to 92.6% in 1993.
Throughout the 1980's the State's expanding economy fostered strong income
and sales tax growth. This enabled the State to record fairly strong fiscal
operations from fiscal years 1984-1989. Preliminary results for fiscal year 1994
indicate an excess of $338 million, which is maintained in reserves. The fiscal
year 1995 budget increases appropriations by 6.2%, inclusive of the new State
lottery, while overall revenues are expected to grow by 7.05% over the previous
fiscal year.
In March 1989, the U.S. Supreme Court (in DAVIS V. MICHIGAN DEPARTMENT OF
TREASURY) ruled unconstitutional the imposition of state income taxes on federal
retirement benefits when state and local benefits were not taxed. Several
related lawsuits have been filed against Georgia, and plaintiffs have requested
refunds for a period beginning in 1980, producing a maximum potential liability
estimated at $591 million. Under the State's three-year statute of limitations,
however, maximum liability is reported at $100 million. On December 6, 1994, the
United States Supreme Court reversed the Georgia Supreme Court's decision in
REICH V. COLLINS, which had determined that the plaintiff federal retiree was
not entitled to a refund of Georgia income taxes paid on federal pension
benefits for tax years before 1989. The United States Supreme Court in REICH
remanded the case to the Georgia Supreme Court for the provision of "meaningful
backward-looking relief" consistent with due process and the controlling case
law.
It has been said that real estate development and expanded construction
employment clearly act as leading indicators in the State economy. Except for
the major building projects necessary for the 1996 Summer Olympics, it appears
unlikely that areas in and around metropolitan Atlanta will experience the
torrent of building that took place in the mid to late 1980's. It further
appears that many of Georgia's other cities are poised to participate in the
recovery that likely will take place.
HAWAII
Hawaii's separation from the mainland and dependence upon tourism make it
unique among the states. In addition to the flow of tourists taking advantage of
the State's climate and beauty, other major sectors of the Hawaiian economy
include construction, retail trade, agriculture, and military operations, all of
which have been adversely affected by recent recessions in the U.S.
(particularly California) and Japan, and cutbacks in military spending. Hawaii's
economy experienced strong growth during the late 1980's, but since 1990 that
rate of growth has slowed considerably, marked by a decrease in Japanese
investment and construction and increased foreign competition in the production
of pineapples and sugar.
Over the years, financial operations in the state have been sound, with
consistently favorable budget performance. Surpluses in excess of 5% of revenues
have regularly triggered constitutionally provided tax credits, even during
fiscal years 1992 and 1993 when revenue growth had slowed due to the recession.
However, because of continuing economic slowdown and growth in expenditures,
particularly Medicaid, the State anticipates lower surpluses over the next
biennium, ending in 1995.
Hawaii's economy remains vulnerable to both California's and Japan's
lingering recessions and the State government cutbacks also may adversely affect
economic growth. These factors, combined with the decline in construction,
suggest that continued stagnation in the near future is probable for Hawaii's
economy, which may well underperform that of the United States as a whole for
the year 1994.
MARYLAND
Maryland, one of the wealthiest states in the nation, experienced rapid
growth during the 1980's. Both total personal income and per capita income
outperformed the national averages until 1990. The economy is well diversified
with services, trade and government accounting for a large percentage of total
employment. Due to Maryland's proximity to Washington D.C., government
employment plays an important role in the economy, which has served to insulate
the regional economy from more volatile economic swings. For this reason, the
unemployment rate in Maryland has historically been below the national average.
B-7
<PAGE>
Maryland has generally been among the most heavily indebted of the states,
although its position was more moderate with the inclusion of local debt,
reflecting in part the State assumption several years ago of local school
construction costs. The State became concerned over its debt levels and,
following recommendations of a debt affordability committee, has practiced
restraint in borrowing. Resources have also expanded and debt ratios have
fallen. Capital borrowing plans are reasonable and designed not to increase debt
levels.
During the three fiscal years from 1991 through 1993, the State's finances
were severely affected by the national recession. Nevertheless, the State closed
fiscal year 1993 with a $10.5 million operating surplus on a budgetary basis 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, 1992 to a positive balance of $113.9 million on June 30,
1993. The 1995 budget continues the trend of increased budgetary reserves. By
the end of fiscal year 1995, Maryland anticipates a $224 million reserve.
MASSACHUSETTS
Massachusetts is an urban, densely populated, wealthy state with a fully
developed industrial economy that has undergone a significant evolution in the
last decade, shifting from textiles, leather products and heavy manufacturing
into high technology and defense related sectors with concomitant growth in
services and trade. Little affected by the national recession of the early
1980s, Massachusetts enjoyed unemployment rates among the lowest in the nation
for most of the decade. But as the economy slowed, unemployment rates rose in
1988, 1989 and 1990, climbing above the national figure to 9.0% in 1991, placing
Massachusetts among those states with the highest unemployment rates in the
nation. Particularly hard hit by job losses were the construction and
manufacturing sectors. Personal income growth, both for the total and on a per
capita basis, also slowed to below the national rate in 1989 although per capita
personal income levels are still far above the U.S. figure. It appears that two
of the factors contributing to the earlier economic boom--large increases in
defense contract spending and low oil prices--are no longer present, and the
inflation in the relative costs of land and labor also poses an economic
disadvantage.
The recent economic downturn has had serious adverse effects on
Massachusetts' financial operations, which experienced increasing budgetary
deficits through fiscal year 1990. At the close of fiscal year 1990, the
Commonwealth faced a massive accumulated deficit of $1.45 billion. In order to
regain fiscal solvency, the Commonwealth sold a total of $1.4 billion in
dedicated tax bonds secured by a portion of the Commonwealth's income tax
proceeds as well as the full faith and credit general obligation pledge of the
Commonwealth. Since that time, the Commonwealth has adopted more conservative
revenue forecasting procedures and has moderated spending growth, resulting in
the achievement of balanced budgets in both fiscal year 1991-1992 and fiscal
year 1992-1993. On a statutory accounting basis, the Commonwealth reported that
the Budgeted Operating Funds ended fiscal year 1993 with balances of $562.5
million.
Despite concerted efforts to control Massachusetts' financial operations,
and some progress in that regard, substantial risks to the Commonwealth's
financial stability remain and economic growth is not likely to return soon to
the vigorous pace evident in the 1980's. Whether improved channels of
communication and efforts towards cooperation between the Commonwealth
legislature and executive will continue remains uncertain. Local economic
conditions remain weak, and the Commonwealth is likely to continue to face
considerable difficulty in balancing its annual operating budgets. Education
reform legislation enacted in June 1993 is estimated to require annual spending
increases for elementary and secondary education of $175 million in fiscal 1994,
$414 million in 1995, and $662 million in 1996. This program will absorb a large
part of the Commonwealth's future revenue growth.
Proposition 2 1/2 is a property tax limitation initiative passed by
Massachusetts voters in 1980. In general, Proposition 2 1/2 constrains the
ability of cities and towns to raise property tax revenues, virtually the only
local-source revenue available, and this may lead to adverse consequences on the
financial condition of some municipalities. Under Proposition 2 1/2, many cities
and towns were required to reduce their property tax levies to a stated
percentage of the full and fair cash value of their taxable real estate and
personal property. It limited the amount by which the total property taxes
assessed by all cities and towns may increase from year to year.
MICHIGAN
The State of Michigan is a highly industrialized state and its economy is
principally dependent upon three sectors: manufacturing (particularly durable
goods, automotive products and office equipment), tourism and
B-8
<PAGE>
agriculture. Since the mid-1980's, Michigan's economy has continued to
experience a restructuring, with significant growth in trade and services more
than compensating for the loss of manufacturing jobs. However, the state's
economy remains dominated by the automotive products industry which has only
recently recovered from a prolonged downturn in production levels. Thus, the
economy tends to be more vulnerable to economic cycles than those of other
states and the nation as a whole.
The Michigan Senate Fiscal Agency Budget Status Report (issued in January
1994) projects continued improvement in Michigan's economy through 1995. The
principal reasons are expected to be increased motor vehicle sales and growth in
the service industry, wholesale and retail trade, and construction sectors of
the State's economy. Total wage and salary employment is projected to grow 2.2%
in 1994 and another 1.8% in 1995, an increase over recent years which reflects
the ongoing diversification of the Michigan economy as well as the revived
automotive products industry. The unemployment rate is projected to decline from
6.7% in 1993 to 5.3% in 1994 and 5.5% in 1995, continuing the recent trend of
Michigan's unemployment rate to reach or fall below the national average, as
contrasted to a prior 15-year history of Michigan having higher unemployment.
Personal income growth, as a result of the shift from higher paying
manufacturing jobs to lower paying service jobs, has risen at a slower pace than
in the nation and per capita income continues to be slightly below the U.S.
average.
The principal revenue sources for the State's General Fund are sales,
personal income, single business and excise taxes. Under the State Constitution,
expenditures from the General Fund are not permitted to exceed available
revenues. The principal expenditures from the General Fund are for education,
public protection, mental and public health and social services. The State's
finances have improved in the past two fiscal years and have recovered from a
period of budget imbalances in fiscal years 1990 and 1991. For fiscal year 1992,
the State achieved a budget surplus by using budgetary reserves and deferring
local government payments. In fiscal 1993, the State achieved a budget surplus
as the result of accounting adjustments and other payment deferrals. A budget
surplus of approximately $200 million is projected for the fiscal year ended
September 30, 1994, largely as a result of higher tax revenues. The State
government continues to reduce its scope through expenditure cuts and the
privatization of certain state-provided activities and services.
In July 1993, legislation was enacted to eliminate the use of property tax
revenues for local and intermediate school district operating purposes. This
legislation did not contain any method of replacing the revenues lost from such
taxes or provide for other means of financing public education, which the State
is constitutionally obligated to do. A proposal to replace such property tax
revenues through an increase in the State's sales tax from 4% to 6% together
with a variety of increases in other consumption-based or special taxes was
approved by Michigan voters in March, 1994 and became effective on May 1, 1994.
The ultimate impact of these new taxes may have a significant effect on the
economy of the State and may change the State's method of conducting and
financing public education.
Although revenue obligations of the State or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that further economic difficulties, with the resulting impact on
State and local government finances, will not adversely affect the market value
of municipal obligations held in the portfolios of the Michigan Series or the
ability of the respective obligors to make required payments on such
obligations.
MINNESOTA
Diversity and a significant natural resource base are two important
characteristics of the Minnesota economy. Generally, the structure of the
State's economy parallels the structure of the United States economy as a whole.
There are, however, employment concentrations in durable goods and non-durable
goods manufacturing, particularly industrial machinery, fabricated metals,
instruments, food, paper and allied industries.
The State relies heavily on a progressive individual income tax and a retail
sales tax for revenue, which results in a fiscal system that is sensitive to
economic conditions. During the period from 1980 to 1990, overall employment
growth in Minnesota lagged behind national employment growth, in large part due
to declining agricultural employment. The rate of employment growth in Minnesota
exceeded the rate of national growth, however, in the period 1990 to 1993. Since
1980, Minnesota per capita income has generally remained above the national
average, although personal income in Minnesota grew more slowly than the
national average
B-9
<PAGE>
during the period of 1992 and 1993. Minnesota personal income growth in 1993 was
slowed by a decline in farm income as a result of cool, wet weather. During 1993
and 1994, the State's monthly unemployment rate was generally less than the
national unemployment rate.
Frequently in recent years, legislation has been required to eliminate
projected budget deficits by raising additional revenue, reducing expenditures,
including aids to political subdivisions and higher education, reducing the
State's budget reserve, imposing a sales tax on purchases by local governmental
units, and making other budgetary adjustments.
A budget forecast released by the Minnesota Department of Finance on
December 6, 1994 projects a General Fund balance of $268 million at the end of
the current biennium, June 30, 1995, plus a budget reserve of $500 million.
Total projected expenditures and transfers for the biennium are $16.9 billion.
State law imposes caps on appropriations for education (including higher
education) and human services in the biennium ending June 30, 1997. It is
anticipated as a result of these caps either that spending in these areas will
be reduced below levels needed to maintain current programs or that other
budgetary changes will need to be made by the State for that biennium. Either
approach could result in fiscal difficulties for other governmental entities in
Minnesota. The forecast does not reflect the effects of a recent Minnesota
Supreme Court decision that numerous banks are entitled to refunds of Minnesota
bank excise taxes paid for tax years 1979 through 1983. The taxes and interest
to be refunded to banks and other corporations as a result of this decision are
estimated to be approximately $327 million. The State will be permitted to pay
the refunds over a four-year period, which would increase interest payments by
approximately $24 million. The State also is party to a variety of other civil
actions that could adversely affect the State's General Fund.
State grants and aids represent a large percentage of the total revenues of
cities, towns, counties and school districts in Minnesota. Even with respect to
revenue obligations, no assurance can be given that economic or other fiscal
difficulties and the resultant impact on State and local government finances
will not adversely affect the market value of Minnesota Obligations held by the
Minnesota Series and the ability of the respective obligors to make timely
payment of the principal and interest on such obligations.
NEW JERSEY
New Jersey has a highly diversified economy which has evolved from a heavier
dependence on manufacturing to one more based on trade and services. The State
fully participated in the national economic recovery and did not experience the
brunt of the recession in the Northeast until much later than many other states.
The rate of unemployment was consistently below the national average through
1991, although the unemployment rate in 1992 rose well above that of the nation.
While personal income growth lagged behind the U.S. level in 1989 and 1991,
since 1989, the State's per capita income remains the second highest in the U.S.
The principal sources of revenue for the State are sales, corporate and
personal income taxes. The Constitution of the State prohibits the expenditure
of funds in excess of the State's revenues and reserves. Since the Constitution
was adopted in 1947, New Jersey has always had a positive undesignated fund
balance in its general fund at the end of each year. A favorable economy
translated into substantial growth in revenues and surpluses; from fiscal year
1984 to 1988 revenues grew almost 40%. Economic slowdown translated into revenue
shortfalls and operating deficits in fiscal years 1989 and 1990. Surplus
balances, which peaked at over $1.2 billion in fiscal year 1988, fell to $116
million (excluding the Transition School Aid Account) by fiscal year-end 1991.
At first, the State was able to use its significant fund balance reserves to
cushion against the large imbalance between revenues and expenditures. However,
in fiscal year 1991, a $1.4 billion tax program was required to balance the
budget.
In fiscal year 1993, the State resorted to a number of non-recurring
revenues to balance its budget. In addition, the challenge to balance its budget
was made greater by a tax revolt among voters in the 1991 elections that
resulted in a move in the new legislature to reduce the sales tax by 1%, from 7%
to 6%. The State's Governor is keeping a campaign promise to reduce the State
income tax by 10% per year for the next three years, beginning with the fiscal
year 1995 budget. A balanced budget was achieved by delaying a $1.1 billion
contribution to the State employees' pension fund. This move, on top of heavy
borrowing by the previous
B-10
<PAGE>
administration, has caused concern among some analysts that the State bond
rating may be adversely affected. The 1995 budget, which slightly reduces total
spending to $15.3 billion, is already under serious pressure by a recent State
Supreme Court decision requiring New Jersey to correct a school funding
disparity by 1996.
NEW YORK
New York State is the third most populous state in the nation (behind
California and Texas) and has a relatively high level of personal wealth. The
State's economy is diverse with a comparatively large share of the nation's
finance, insurance, transportation, communications and services employment, and
a comparatively small share of the nation's farming and mining activity. The
State has a declining proportion of its work force engaged in manufacturing and
an increasing proportion of its work force engaged in service industries. This
transition reflects a national trend. Historically, the State has been one of
the wealthiest states in the nation. For decades, however, the State has grown
more slowly than the nation as a whole, gradually eroding its relative economic
affluence.
A nation-wide recession commenced in mid-1990. The downturn continued
throughout the State's 1990-1991 fiscal year and was followed by a period of
weak economic growth during the 1991 and 1992 calendar years. For calendar year
1993, the economy grew faster than in 1992, but still at a very modest rate, as
compared to other recoveries. Moderate economic growth is expected to continue
in calendar year 1994 at a slightly faster rate than in 1993. Economic recovery
started considerably later in the State than in the nation as a whole due in
part to the significant retrenchment in the banking and financial services
industries, downsizing by several major corporations, cutbacks in defense
spending, and an over supply of office buildings.
The New York economy, as measured by employment, shifted from recession to
recovery near the start of calendar year 1993. During the course of calendar
year 1993, employment began to increase, albeit sporadically, and the
unemployment rate declined. The recovery is expected to continue in calendar
year 1994, with employment growing more rapidly, on average, than in the
previous calendar year.
On June 7, 1994, the State legislature enacted the fiscal year 1994-1995
budget, which Governor Cuomo signed into law on June 9, 1994. The 1994-1995
budget contains several business tax incentives but does not implement those
portions of the personal income tax reduction and reform program that was
enacted in 1987 and subsequently delayed and restructured during fiscal years
1990-91 through 1993-94.
The State's budgets for fiscal years 1992-1993 and 1993-1994 have produced
cash surpluses for the first time since fiscal year 1987-1988. The 1994-1995
budget is projected to result in a substantial deficit, perhaps as large as $5
billion. There can be no assurances that the State will not face substantial
potential budget gaps in future years resulting from a significant disparity
between tax revenues projected from a lower recurring receipts base and the
spending required to maintain State programs at current levels. To address any
potential budgetary imbalance, the State may need to take significant actions to
align recurring receipts and disbursements in future fiscal years.
NORTH CAROLINA
The following discussion regarding the financial condition of the North
Carolina State government may not be relevant to general obligation or revenue
bonds issued by political subdivisions of the State. Such information, and the
following discussion regarding the economy of the State, is included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of North Carolina obligations.
The economic profile of North Carolina consists of a combination of
industry, agriculture and tourism. The population of the State increased 13%
between 1980 and 1990, from 5,880,095 to 6,647,351 as reported by the 1990
federal census. Although North Carolina is the tenth largest state in
population, it is primarily a rural state, having only five municipalities with
populations in excess of 100,000. The State has moved from an agricultural to a
service and goods producing economy. During the period 1980 to 1992, the State
labor force grew about 22% (from 2,855,200 to 3,487,500), and during the period
1980-1990 per capita income grew from $7,999 to $16,203, an increase of 102.6%.
The North Carolina State Constitution requires that the total expenditures
of the State for the fiscal period covered by each budget not exceed the total
of receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period.
B-11
<PAGE>
In 1990 and 1991 the State had difficulty meeting its budget projections.
The General Assembly responded by enacting a number of new taxes and fees to
generate additional revenue and reduce allowable departmental operating
expenditures and continuation funding.
The State, like the nation, has experienced economic recovery since 1991.
Apparently due to both increased tax and fee revenue and the previously enacted
spending reductions, the State had a budget surplus of approximately $887
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 for economic development, education,
human services and environmental programs. Based on projected growth in State
tax and fee revenues, the General Fund balance forecast for the end of the
1994-1995 fiscal year is approximately $310 million.
In SWANSON, ET AL. V. STATE OF NORTH CAROLINA, ET AL., certain federal
retirees and federal military personnel plaintiffs brought an action in North
Carolina State court seeking refund of illegal taxes. On appeal by the
plaintiffs, the U.S. Supreme Court remanded the case to the North Carolina
Supreme Court in light of the U.S. Supreme Court's decision in HARPER V.
VIRGINIA DEPARTMENT OF TAXATION. The impact of HARPER on the estimated $140
million of refund claims in SWANSON has not been determined. On March 4, 1994,
in an unpublished opinion, the North Carolina Supreme Court decided in favor of
the State, dismissing the SWANSON case. The plaintiffs reportedly will appeal to
the United States Supreme Court. The HARPER decision also reactivated the damage
claims brought by the SWANSON plaintiffs in the United States District Court for
the Eastern District of North Carolina.
Both the nation and the State have experienced a modest economic recovery in
recent months. However, it is unclear what effect these developments, as well as
the reduction in government spending or increase in taxes, may have on the value
of the debt obligations in the North Carolina Series. No clear upward trend has
developed, and both the State and the national economies must be watched
carefully.
OHIO
The Ohio economy, while diversifying more into the service and other
non-manufacturing areas, continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic activity
in Ohio, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the State's economy, with over half the State's area
devoted to farming. An estimated 15% of total Ohio employment is in
agribusiness.
During the 1980's, the State's economy experienced steady growth and
diversification of employment and earnings; however, per capita personal income
in 1993 was only 94.6% of the U.S. average. Manufacturing, which employed 28.8%
of the labor force in 1980 declined to 21.7% in 1992. Manufacturing employment
losses have in large part been offset by gains in services, trade, finance,
insurance and real estate. Prior recessions have contributed to some weakness in
the State's revenues and increases in some expenditures.
In fiscal year 1992, revised economic forecasts indicated a revenue
shortfall of $314 million, which combined with expenditure increases produced a
$457 million projected General Revenue Fund deficit. Administrative actions by
the Governor yielding $184 million of savings and $143.4 million of transfers
and accelerations reduced the size of the gap. The General Fund budgetary
balance was reduced to $90.5 million and the $300 million Budget Stabilization
Reserve was exhausted. Fiscal year 1993 marked a third year of mid-course
corrective budget actions, including expansion and adjustment of the State sales
tax, imposition of new excise taxes, implementation of a new personal income tax
bracket, and an increase in the cigarette tax. The State ended fiscal 1993 with
a $111 million General Revenue Fund balance.
The General Revenue Fund appropriations act for the current 1994-1995
biennium was passed and signed by the Governor on July 1, 1993. It includes all
necessary General Revenue Fund appropriations for biennial State debt service
and lease rental payments.
The incurrence or assumption of debt by the State without a popular vote is,
with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits or
B-12
<PAGE>
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 the debts of any local government or corporation, except for debt
incurred to repel invasion, suppress insurrection, or defend the State in war.
Although revenue obligations of the State or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that economic difficulties and the resulting impact on State and
local governmental finances will not adversely affect the market value of
municipal obligations held in the portfolio of the Ohio Series or the ability of
the respective obligors to make required payments on such obligations.
PENNSYLVANIA
Pennsylvania is an established state with a diversified economy.
Pennsylvania has been historically identified as a heavy industry state,
although that reputation has recently changed as the composition of the
Commonwealth diversified when the coal, steel and railroad industries began to
decline. The major sources of revenue growth in Pennsylvania are in the service
sector, including trade, medical and the health services, education and
financial institutions.
The five-year period from fiscal 1989 through fiscal 1993 was marked by
public health and welfare costs growing at a rate double the growth rate for all
the Commonwealth expenditures. Rising caseloads, increased utilization of
services and rising prices joined to produce the rapid rise of public health and
welfare costs at a time when a national recession caused tax revenues to
stagnate and even decline. During the period from fiscal 1989 through fiscal
1993, public health and welfare costs rose by an average annual rate of 5.5%.
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 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.
For the fiscal 1993 year, the General Fund closed with revenues higher than
anticipated and expenditures about as projected, resulting in an ending
unappropriated balance surplus (on a budgetary basis) of $242.3 million. Cash
revenues for 1993 were $41.5 million above the budget estimate and totalled
$14.633 billion (representing less than a 1% increase over fiscal 1992
revenues). A reduction in the personal income tax rate in July 1992 and revenues
from retroactive corporate tax increases received in fiscal 1992 were
responsible, in part, for the low rate of revenue growth. Appropriations (less
lapses) totalled an estimated $13.870 billion (representing a 1.1% increase over
fiscal year 1992 appropriations). The low growth in spending was reportedly a
consequence of the low rate of revenue growth, significant one-time expenses
during fiscal 1992, increased tax refund reserves to cushion against adverse
decisions on pending litigations, and the receipt of federal funds for
expenditures previously paid out of Commonwealth funds.
The 1994 fiscal year closed with revenues of $15,210.7 million (on a
budgetary basis), $38.6 million above the fiscal year estimate. 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 fiscal 1995 budget provides for $15,652.9 million of appropriations, an
increase of 3.9% over appropriations for fiscal 1994. The budget also includes
tax reductions totaling an estimated $166.4 million. The fiscal 1995 budget
projects a $4 million fiscal year-end unappropriated surplus. However, in a
recent mid-fiscal-year budget briefing, Governor Casey told legislative leaders
that projected revenues will grow by $522 million over expectations for the
current year, resulting in a projected surplus of $401 million at June 30, 1995.
According to the Governor, this amount, when added to other cost savings and
existing reserves, results in a total projected surplus of over $1 billion.
B-13
<PAGE>
Recent economic indicators suggest that the Pennsylvania economy is growing
at a moderate pace. The expansion is generally broad-based across geographic
regions and industrial sectors, and inflation is not accelerating. Some evidence
suggests, however, that the pace of growth may slow somewhat in the coming
months.
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 revenues 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, 1994, the Commonwealth had $5,075.8 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 its inhabitants
citizens of the United States.
The economy of Guam revolves around the significant U.S. military presence
on the island. The federal government is the largest employer on the island; in
1991, there were a total of 10,757 active duty military personnel and
approximately 7,762 civilian personnel. Military spending makes a significant
contribution to Guam's economy, exceeding $587 million in 1991. The U.S.
military presence on Guam has increased recently, due to the closure of Subic
Bay Naval Base and Clark Air Force Base in the Philippines. The United States
Air Force headquarters has also relocated to Guam from Clark Air Force Base.
Tourism also plays a major role in Guam's economy. With visitors coming
mainly from Japan, tourist arrivals rose by more than 16% annually between 1985
and 1990. In 1991, there were 737,260 tourist arrivals, with tourist
expenditures exceeding $600 million. Nevertheless, recent earthquakes, typhoons
and the economic slowdown in Japan have had adverse effects on Guam's economy.
Guam's economy is also based on the export of fish and handicrafts. Guam is a
duty-free port and an important distribution point for goods destined for
Micronesia. Unemployment, which has been historically low, was 2.2% in 1991.
PUERTO RICO
Puerto Rico enjoys a Commonwealth status with the U.S. as a result of Public
Law 600, enacted by the U.S. Congress in 1950 and affirmed by a referendum in
1952. Residents of Puerto Rico are U.S. citizens.
Since World War II, Puerto Rico has undergone a social and economic
transformation. Once agrarian and densely populated, marked by rural poverty, it
is now an urbanized society with an economy producing the bulk of its earnings
from manufacturing and services. Despite its long term economic progress,
unemployment and poverty remain significant problems. The island's 1993
unemployment rate of 17% was more than double the corresponding U.S. figure, and
income data for the island compare unfavorably with even the poorest of the 50
states.
Financial operations of recent years have reflected general economic trends,
with fiscal improvement registered during good economic times and deterioration
during slowdown. In the mid-1980's, economic recovery and stable oil prices
helped the Commonwealth to reduce the General Fund's accumulated deficit. Later,
as economic slowdown placed financial operations under pressure, the
Commonwealth sought budgetary balance, but with regular reliance on
non-recurring measures. The General Fund closed in a negative cash position in
fiscal years 1992 and 1993. The Commonwealth had projected only a modest
improvement in the General Fund's negative ending position for fiscal year 1994,
even after the announcement in February 1994 of a $211 million increase in the
revenue estimate.
B-14
<PAGE>
In 1993, Congress passed legislation which restricts corporations' ability
to take advantage of Section 936 credits. The extent to which these changes will
slow business investment in Puerto Rico is not clear, although some slowing
effect is to be expected. Also in 1993, the Senate approved NAFTA, which will
pose a new challenge to the Puerto Rican economy by increasing competition in
certain areas with Mexico.
UNITED STATES VIRGIN ISLANDS
The Virgin Islands, comprised of St. Thomas, St. Croix and St. John, form an
unincorporated territory of the United States. The residents of the islands were
granted a measure of self-government by the Organic Act, as revised in 1954.
The Islands are heavily dependent on links with the U.S. mainland, with more
than 90% of its trade being conducted with Puerto Rico and the U.S. Tourism is
the predominant source of employment and income for the islands. The emphasis is
on the visiting cruise ship business and the advantages of duty-free purchases
for American visitors. Following declines in the numbers of tourists visiting
the Virgin Islands in 1992, in 1993 occupancy rates at hotels and on cruise
ships have increased with visitors from the U.S. up 18% and visitors from Europe
up 30% from a year before.
The Territorial Government also plays a vital role in the economy of the
Virgin Islands. Since governmental services must be provided on three separate
islands, the duplication of effort results in the unusually large public sector.
In 1993, 26.8% of total employment resulted from Territorial government
employment. The level of unemployment has been consistently low, but rose to
3.1% in May 1993.
FLOATING RATE AND VARIABLE RATE SECURITIES
Each series may invest more than 5% of its assets in floating rate and
variable rate securities, including participation interests therein and (for
series other than money market series) inverse floaters. Floating rate
securities normally have a rate of interest which is set as a specific
percentage of a designated base rate, such as the rate on Treasury Bonds or
Bills or the prime rate at a major commercial bank. The interest rate on
floating rate securities changes whenever there is a change in the designated
base interest rate. Variable rate securities provide for a specific periodic
adjustment in the interest rate based on prevailing market rates and generally
would allow the series to demand payment of the obligation on short notice at
par plus accrued interest, which amount may be more or less than the amount the
series paid for them. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another security or the value of an index. Changes in the interest rate on
the other security or interest inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
Each series may invest in participation interests in variable rate
tax-exempt securities (such as certain IDBs) owned by banks. A participation
interest gives the series an undivided interest in the tax-exempt security in
the proportion that the series' participation interest bears to the total
principal amount of the tax-exempt security and generally provides that the
holder may demand repurchase within one to seven days. Participation interests
frequently are backed by an irrevocable letter of credit or guarantee of a bank
that the investment adviser under the supervision of the Trustees has determined
meets the prescribed quality standards for the series. A series generally has
the right to sell the instrument back to the bank and draw on the letter of
credit on demand, on seven days' notice, for all or any part of the series'
participation interest in the par value of the tax-exempt security, plus accrued
interest. Each series intends to exercise the demand under the letter of credit
only (1) upon a default under the terms of the documents of the tax-exempt
security, (2) as needed to provide liquidity in order to meet redemptions or (3)
to maintain a high quality investment portfolio. Banks will retain a service and
letter of credit fee and a fee for issuing repurchase commitments in an amount
equal to the excess of the interest paid by the issuer on the tax-exempt
securities over the negotiated yield at which the instruments were purchased
from the bank by a series. The investment adviser will monitor the pricing,
quality and liquidity of the variable rate demand instruments held by each
series, including the IDBs supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other bank analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
B-15
<PAGE>
PUT OPTIONS
Each series may acquire put options (puts) giving the series the right to
sell securities held in the series' portfolio at a specified exercise price on a
specified date. Such puts may be acquired for the purpose of protecting the
series from a possible decline in the market value of the securities to which
the put applies in the event of interest rate fluctuations and, in the case of
liquidity puts, to shorten the effective maturity of the underlying security.
The aggregate value of the premiums paid to acquire puts held in a series'
portfolio (other than liquidity puts) may not exceed 10% of the net asset value
of such series. The acquisition of a put may involve an additional cost to the
series by payment of a premium for the put, by payment of a higher purchase
price for securities to which the put is attached or through a lower effective
interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades (two
highest grades for the money market series) as determined by Moody's or S&P; or
(2) the put is written by a person other than the issuer of the underlying
security and such person has securities outstanding which are rated within such
four (or two for the money market series) highest quality grade of such rating
services; or (3) the put is backed by a letter of credit or similar financial
guarantee issued by a person having securities outstanding which are rated
within the two highest quality grades of such rating services.
One form of transaction involving liquidity puts consists of an underlying
fixed rate municipal bond that is subject to a third party demand feature or
"tender option". The holder of the bond would pay a "tender fee" to the third
party tender option provider, the amount of which would be periodically adjusted
so that the bond/ tender option combination would reasonably be expected to have
a market value that approximates the par value of the bond. This bond/tender
option combination would therefore be functionally equivalent to ordinary
variable or floating rate obligations and the Fund may purchase such obligations
subject to certain conditions specified by the Securities and Exchange
Commission (SEC).
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
FUTURES CONTRACTS. Each series (except for the money market series) may
engage in transactions in financial futures contracts as a hedge against
interest rate related fluctuations in the value of securities which are held in
the investment portfolio or which the series intends to purchase. A clearing
corporation associated with the commodities exchange on which a futures contract
trades assumes responsibility for the completion of transactions and guarantees
that open futures contracts will be closed. Although interest rate futures
contracts call for actual delivery or acceptance of debt securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin". Subsequent payments to and from the broker, called
"variation margin", will be made on a daily basis as the price of the underlying
security or index fluctuates, making the long and short positions in the futures
contracts more or less valuable, a process known as "marking to the market."
When a series purchases a futures contract, it will maintain an amount of
cash, U.S. Government obligations or liquid, high-grade debt securities in a
segregated account with the Fund's Custodian, so that the amount so segregated
plus the amount of initial and variation margin held in the account of its
broker equals the market value of the futures contract, thereby ensuring that
the use of such futures contract is unleveraged. A series that has sold a
futures contract may "cover" that position by owning the instruments underlying
the futures contract or by holding a call option on such futures contract. A
series will not sell futures contracts if the value of such futures contracts
exceeds the total market value of the securities of the series. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
B-16
<PAGE>
OPTIONS ON FINANCIAL FUTURES. Each series (other than the money market
series) may purchase call options and write put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. Each series will use options on futures in
connection with hedging strategies.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently, options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.
When a series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option. In instances involving the purchase of a call
option on a futures contract, the series will deposit in a segregated account
with the Fund's Custodian an amount in cash, U.S. government obligations or
liquid, high-grade debt securities equal to the market value of the obligation
underlying the futures contract, less any amount held in the initial and
variation margin accounts.
LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of "commodity pool operator," subject to
compliance with certain conditions. The exemption is conditioned upon a series'
purchasing and selling financial futures contracts and options thereon for BONA
FIDE hedging transactions, except that a series may purchase and sell futures
contracts and options thereon for any other purpose to the extent that the
aggregate initial margin and option premiums do not exceed 5% of the liquidation
value of the series' total assets. Each series will use financial futures in a
manner consistent with these requirements. With respect to long positions
assumed by a series, the series will segregate with the Fund's Custodian an
amount of cash, U.S. Government securities or liquid, high-grade debt securities
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the futures
contracts and thereby insures that the use of futures contracts is unleveraged.
Each series will continue to invest at least 80% of its total assets in
municipal obligations except in certain circumstances, as described in its
Prospectus under "How the Fund Invests--Investment Objective and Policies." A
series may not enter into futures contracts if, immediately thereafter, the sum
of the amount of initial and net cumulative variation margin on outstanding
futures contracts together with premiums paid on options thereon, would exceed
20% of the total assets of the series.
RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests--Investment Objective and Policies-- Futures Contracts and
Options Thereon" in each series' Prospectus, there are a number of other risks
associated with the use of financial futures for hedging purposes.
Each series intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in the futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and, in the event of
adverse price movements, the series would continue to be required to make daily
B-17
<PAGE>
cash payments of variation margin. However, if futures contracts have been sold
to hedge portfolio securities, these securities will not be sold until the
offsetting futures contracts can be purchased. Similarly, if futures have been
bought to hedge anticipated securities purchases, the purchases will not be
executed until the offsetting futures contracts can be sold.
The hours of trading of interest rate futures may not conform to the hours
during which the series may trade municipal securities. To the extent that the
futures markets close before the municipal securities market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange, (v) the facilities of an exchange
may not at all times be adequate to handle current trading volume or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis, in which case delivery and payment normally take place within
one month after the date of the commitment to purchase. The payment obligation
and the interest rate that will be received on the tax-exempt securities are
each fixed at the time the buyer enters into the commitment. The purchase price
for the security includes interest accrued during the period between purchase
and settlement and, therefore, no interest accrues to the economic benefit of
the series until delivery and payment take place. Although a series will only
purchase a tax-exempt security on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the
B-18
<PAGE>
extent that a series remains substantially fully invested at the same time that
it has purchased securities on a when-issued or delayed delivery basis, the
market value of the series' assets will vary to a greater extent than otherwise.
Purchasing a tax-exempt security on a when-issued or delayed delivery basis can
involve a risk that the yields available in the market when the delivery takes
place may be higher than those obtained on the security so purchased.
A segregated account of each series consisting of cash or liquid high-grade
debt securities equal to the amount of the when-issued and delayed delivery
commitments will be established with the Fund's Custodian and marked to market
daily, with additional cash or liquid high-grade debt securities added when
necessary. When the time comes to pay for when-issued or delayed delivery
securities, the series will meet their respective obligations from then
available cash flow, sale of securities held in a separate account, sale of
other securities or, although they would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a value greater or
less than the series' payment obligations). The sale of securities to meet such
obligations carries with it a greater potential for the realization of capital
gain, which is not exempt from state or federal income taxes. See "Distributions
and Tax Information."
Each series (other than the money market series) may also purchase municipal
forward contracts. A municipal forward contract is a municipal security which is
purchased on a when-issued basis with delivery taking place up to five years
from the date of purchase. No interest will accrue on the security prior to the
delivery date. The investment adviser will monitor the liquidity, value, credit
quality and delivery of the security under the supervision of the Trustees. The
Fund has obtained a ruling from Florida authorities that such municipal forward
contracts qualify as assets exempt from the Florida intangibles tax.
PORTFOLIO TURNOVER
Portfolio transactions will be undertaken principally to accomplish a
series' objective in relation to anticipated movements in the general level of
interest rates but a series may also engage in short-term trading consistent
with its objective. Securities may be sold in anticipation of a market decline
(a rise in interest rates) or purchased in anticipation of a market rise (a
decline in interest rates) and later sold. In addition, a security may be sold
and another purchased at approximately the same time to take advantage of what
the investment adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, due to such factors as changes in the
overall demand for or supply of various types of tax-exempt securities or
changes in the investment objectives of investors.
The Fund's investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by a series is known as "portfolio turnover" and may involve the
payment by the series of dealer mark-ups or underwriting commissions, and other
transaction costs on the sale of securities, as well as on the reinvestment of
the proceeds in other securities. Portfolio turnover rate for a fiscal year is
the ratio of the lesser of purchases or sales of portfolio securities to the
monthly average of the value of portfolio securities--excluding securities whose
maturities at acquisition were one year or less. A series' portfolio turnover
rate will not be a limiting factor when the Fund deems it desirable to sell or
purchase securities. For the fiscal year ended August 31, 1994, the portfolio
turnover rate of each series, other than the Hawaii Income Series (which
commenced investment operations on September 19, 1994) and the money market
series, was as follows:
<TABLE>
<CAPTION>
PORTFOLIO
SERIES TURNOVER RATE
- ----------------------------------------------------------------------------- --------------
<S> <C>
Arizona...................................................................... 33%
Florida...................................................................... 75%
Georgia...................................................................... 27%
Maryland..................................................................... 40%
Massachusetts................................................................ 33%
Michigan..................................................................... 12%
Minnesota.................................................................... 21%
New Jersey................................................................... 34%
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO
SERIES TURNOVER RATE
- ----------------------------------------------------------------------------- --------------
<S> <C>
New York..................................................................... 49%
North Carolina............................................................... 17%
Ohio......................................................................... 20%
Pennsylvania................................................................. 22%
</TABLE>
ILLIQUID SECURITIES
A series may invest up to 15% (10% in the case of the money market series)
of its net assets in illiquid securities, including repurchase agreements which
have a maturity of longer than seven days, securities with legal or contractual
restrictions on resale (restricted securities) and securities that are not
readily marketable. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period. Mutual funds do not typically hold a
significant amount of illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the series' limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security,
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the security, and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease, (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease, (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled, (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold, (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics), (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of non-appropriation) and (v)
the legal recourse in the event of failure to appropriate and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser.
REPURCHASE AGREEMENTS
The series' repurchase agreements will be collateralized by U.S. Government
obligations. The series will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees. The
Fund's investment adviser will monitor the creditworthiness of such parties
under the general supervision of the Trustees. In the event of a default or
bankruptcy by a seller, the series will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the series will suffer a loss.
The series participate in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the
series may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund or series participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities (as
defined above).
B-20
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions.
For the purpose of this restriction, the deposit or payment by the Fund
(except with respect to the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New York Money Market Series and the
New Jersey Money Market Series) of initial or maintenance margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may on behalf of a series borrow up to 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
the preference as to shares of a series in liquidation and as to dividends
over all other series of the Fund with respect to assets specifically
allocated to that series, the purchase and sale of futures contracts and
related options, collateral arrangements with respect to margin for futures
contracts, the writing of related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series) and
obligations of the Fund to Trustees pursuant to deferred compensation
arrangements, are not deemed to be a pledge of assets or the issuance of a
senior security. The Fund will not purchase portfolio securities if its
borrowings exceed 5% of the assets.
4. Purchase any security if as a result, with respect to 75% of a
series' total assets (except with respect to the Connecticut Money Market
Series, the Florida Series, the 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.
B-21
<PAGE>
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or programs.
2. Purchase warrants if as a result the Fund would then have more than
5% of its net assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange
or American Stock Exchange will be limited to 2% of the Fund's net assets
(determined at the time of investment). For the purpose of this limitation,
warrants acquired in units or attached to securities are deemed to be
without value.
3. Purchase any interests in real estate limited partnerships which are
not readily marketable.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
5. Purchase the securities of any one issuer if 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.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach.................... Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; prior thereto, Vice Chairman of Broyhill
Management, Inc. Furniture Industries, Inc.; Certified Public Accountant;
One Seaport Plaza Secretary and Treasurer of Broyhill Family Foundation, Inc.;
New York, NY President, Treasurer and Director of The High Yield Plus
Fund, Inc. and First Financial Fund, Inc.; Director of The
Global Government Plus Fund, Inc. and The Global Total
Return Fund, Inc.
Eugene C. Dorsey................... Trustee Retired President, Chief Executive Officer and Trustee of the
c/o Prudential Mutual Fund Gannett Foundation (now Freedom Forum); former Publisher of
Management, Inc. four Gannett newspapers and Vice President of Gannett
One Seaport Plaza Company; past Chairman of Independent Sector (national
New York, NY coalition of philanthropic organizations); former Chairman
of the American Council for the Arts; Director of the
Advisory Board of Chase Manhattan Bank of Rochester and The
High Yield Income Fund, Inc.
Delayne Dedrick Gold............... Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
*Harry A. Jacobs, Jr......... Trustee Senior Director (since January 1986) of Prudential
One Seaport Plaza Securities Incorporated (Prudential Securities);
New York, NY formerly Interim 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.
*Lawrence C. McQuade......... President and Vice Chairman of PMF (since 1988); Managing
One Seaport Plaza Trustee Director, Investment Banking, Prudential
New York, NY Securities (1988-1991); Director of Czech and
Slovak American Enterprise Fund (since October
1994), Quixote Corporation (since February 1992)
and BUNZL, PLC (since June 1991); formerly
Director of Crazy Eddie Inc. (1987-1990) and
Kaiser Tech., Ltd. and Kaiser Aluminum and
Chemical Corp. (March 1987-November 1988);
formerly Executive Vice President and Director
of W.R. Grace & Company; President and Director
of The High Yield Income Fund, Inc, The Global
Government Plus Fund, Inc. and The Global Total
Return Fund, Inc.
Thomas T. Mooney............ Trustee President of the Greater Rochester Metro Chamber
c/o Prudential Mutual Fund of Commerce; former 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........... 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; formerly Director
of TransCanada Pipelines U.S.A. Ltd. (1984-June
1989) and Winthrop University Hospital (November
1976-June 1988); Director of Ridgewood Savings
Bank and Yankee Energy System, Inc.; Secretary
and Trustee of Hofstra University.
<FN>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker.......... Trustee President, Chief Executive Officer and Director
One Seaport Plaza (since October 1993) 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.; Vice
President, The Prudential Investment Corporation
(since July 1994); formerly Senior Executive
Vice President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993);
Director of The Global Government Plus Fund,
Inc., The Global Total Return Fund Inc. and The
High Yield Income Fund, Inc.
Nancy H. Teeters............ Trustee Economist; formerly Vice President and Chief
c/o Prudential Mutual Fund Economist (March 1986-June 1990) of
Management, Inc. International Business Machines Corporation;
One Seaport Plaza Member of the Board of Governors of the Horace
New York, NY H. Rackham School of Graduate Studies of the
University of Michigan; Director of Inland Steel
Industries (since July 1991), First Financial
Fund, Inc. and The Global Total Return Fund,
Inc.
Robert F. Gunia............. Vice Chief Administrative Officer (since July 1990),
One Seaport Plaza President Director (since January 1989), Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities;
Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989).
S. Jane Rose................ Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice
New York, NY President (June 1987-December 1990) of PMF;
Senior Vice President and Senior Counsel (since
June 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of
Prudential Securities.
Susan C. Cote............... Treasurer and Senior Vice President (since January 1989) and
One Seaport Plaza Principal First Vice President (June 1987-December 1988) of
New York, NY Financial and PMF; Senior Vice President (since January 1992)
Accounting and Vice President (January 1986-December 1991)
Officer of Prudential Securities.
<FN>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-24
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME AND ADDRESS POSITION WITH FUND DURING PAST 5 YEARS
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Ronald Amblard..................... Assistant First Vice President (since January 1994) and Associate
One Seaport Plaza Secretary General Counsel (since January 1992) of PMF; Vice President
New York, NY and Associate General Counsel of Prudential Securities
(since January 1992); formerly, Assistant General Counsel
(August 1988-December 1991), Associate Vice President
(January 1989-December 1990) and Vice President (January
1991-December 1993) of PMF.
Deborah A. Docs.................... Assistant Vice President and Associate General Counsel (since January
One Seaport Plaza Secretary 1993) of PMF; Vice President and Associate General Counsel
New York, NY (since January 1993) of Prudential Securities; previously
Associate Vice President (January 1990-December 1992),
Assistant Vice President (January 1989-December 1989) and
Assistant General Counsel (November 1991-
December 1992) of PMF.
</TABLE>
Trustees and officers of the Fund are also Trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $9,000, in
addition to certain out-of-pocket expenses. Messrs. Beach and O'Brien receive
their Trustees' fee pursuant to a deferred fee agreement with the Fund. Under
the terms of the agreement, the Fund accrues daily the amount of such Trustees'
fees which accrue interest at a rate equivalent to the prevailing rate
applicable to 90-day U.S. Treasury Bills at the beginning of each calendar
quarter or, 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.
As of December 2, 1994, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each series of the Fund.
As of December 2, 1994, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Marjorie T. Bergan, 2011 E Flynn Ln, Phoenix, AZ 85016-1113, who
held 226,865 Class A shares of the Arizona Series (34.8%); Madlyn R. Schlosser
Succ TTEE, 18170 N 91st Ave Apt 1156, Peoria, AZ 85382-0868, who held 874 Class
C shares of the Arizona Series (98.0%); Kathleen Sokolik, 3100 Hunter Road, Ft
Lauderdale, FL 33331-3032, who held 16,640 Class B shares of the Florida Series
(5.7%); Ruth E. Beckwith, Charles C. Beckwith Jr, Jules Golden, 2030 S Ocean 150
Twelve Oaks Lane, Ponte Vedra, FL 32082-3943, who held 14,697 Class B shares of
the Florida Series (5.0%); Marcia F. Grimm, 2631 Temple St, Sarasota, FL
34239-2631, who held 16,385 Class B shares of the Florida Series (5.6%); John J.
Grimm, 2631 Temple St, Sarasota, FL 34239-2631, who held 14,629 Class B shares
of the Florida Series (5.0%); Gerald T. Vento, 5610 Wisconsin Ave #1207, Chevy
Chase, MD 20815-4419, who held 65,549 Class C shares of the Florida Series
(6.1%); Charles R. Perry Const Inc., PO Box 1073, Gainesville, FL 32602-1073,
who held 98,542 Class C shares of the Florida Series (9.1%); Edna Anderson and
Warren Anderson
B-25
<PAGE>
c/o Marquette, 4176 Arapaho Drive SW, Powder Springs, GA 30073-5021, who held
20,706 Class A shares of the Georgia Series (20.5%); James C. Seigler II and
April D. Seigler, 5286 Cardinal Lane, Lilburn, GA 30247-5902, who held 8,140
Class A shares of the Georgia Series (8.0%); Mrs. Johnsie S. Ladson, 920 1st St
SE, Moultrie, GA 31768-5602, who held 8,707 Class A shares of the Georgia Series
(8.6%); Edwin P. Echols & Lurline W. Echols, 2940 East Lake Road, Mc Donough, GA
30253-4927, who held 8,144 Class A shares of the Georgia Series (8.1%); Joy D.
Merriam, 905 E College St, Griffin, GA 30223-5036, who held 7,731 Class A shares
of the Georgia Series (7.6%); Prudential Mutual Fund Svcs Audit Account, P.O.
Box 15025, New Brunswick, NJ 08906-5025, which held 17 Class C shares of the
Georgia Series (94.7%); Prudential Mutual Fund Management Inc., ATTN Dennis
Annarumma, One Seaport Plaza, New York, NY 10038-3526, which held 171,831 Class
A shares of the Hawaii Income Series (83.9%); Erika K. Hsiao, 1434 Punahou St,
Honolulu, HI 96822-4754, who held 40,671 Class B shares of the Hawaii Income
Series(10.9%); First Hawaiian Bank, For Elmer L. Hann, P.O. Box 3200, Honolulu,
HI 96847, who held 25,925 Class B shares of the Hawaii Income Series (6.6%);
Desmond K. Brooks and Pauline M. Brooks and Sharon M. Wong, 210 Ward Ave #216,
Honolulu, HI 96814-4008, who held 4,645 Class C shares of the Hawaii Income
Series (16.2%); Ralph S. Tawata & Betty Y. Tawata, 3150 Oahu Ave, Honolulu, HI
96822-1246, who held 4,511 Class C shares of the Hawaii Income Series (15.7%);
Saundra Gay Lormand TTEE, FBO Mildred E. M. Kraynik, 1641 Vancouver Way,
Livermore, CA 94550-6133, who held 4,338 Class C shares of the Hawaii Income
Series (15.1%); Trish O. Eustace, 1930 Alaeloa St, Honolulu, HI 96821-1019, who
held 6,550 Class C shares of the Hawaii Income Series (22.8%); Audrey E.
Kitagawa, 820 Mililani St, STE# 615, Honolulu, HI 96813-2936, who held 2,168
Class C shares of the Hawaii Income Series (7.5%); Yuk Ping Fong & Shereen Y. K.
Fung, 2703 Rooke Ave, Honolulu, HI 96817-1352, who held 1,736 Class C shares of
the Hawaii Income Series (6.0%); Marian R. Chychota, 4314 Flowerton Rd,
Baltimore, MD 21229-1507, who held 14,784 Class A shares of the Maryland Series
(6.5%); Mr. Abraham G. Stone, 4713 Pard Rd, Capitol Heights, MD 20743-5265, who
held 48,795 Class A shares of the Maryland Series (21.3%); Wanda Markakis, 351
Autumwood Drive, Mechanicsville, MD 20659, who held 27,201 Class A shares of the
Maryland Series (11.9%); Creston & Betty Jane Tate, Two Concourse Pkwy Ste 500,
Atlanta, GA 30328-5347, who held 510,772 Class B shares of the Maryland Series
(11.4%); Maureen Dilonardo Troiano, 9416 Winterset Dr, Potomac, MD 20854-2844,
who held 8,220 Class C shares of the Maryland Series (75.4%); Henry Nathan II
and Elaine T. Nathan, 6222 Roblynn Rd, Laurel, MD 20707-2635, who held 1,416
Class C shares of the Maryland Series (13.0%); Elbertha S. Cassedy, 506 S
Newkirk St, Baltimore, MD 21224-4429, who held 1,250 Class C shares of the
Maryland Series (11.5%); Dorothy A. Crofoot, 21 Hillside Drive, East Longmeadow,
MA 01028-2505, who held 16,265 Class A shares of the Massachusetts Series
(8.1%); Doris G. Kleitmann, 24 Davenport Road, Weston, MA 02193-1501, who held
20,131 Class A shares of the Massachusetts Series (10.1%); Charles H. Trenoweth,
66 Massasoit Ave, Mashpee, MA 02649-4422, who held 33,210 Class A shares of the
Massachusetts Series (16.6%); Ellen D. Rothberg, 102 West Emerson St, Melrose,
MA 02176-3129, who held 449 Class C shares of the Massachusetts Series (32.8%);
Penny Christopher, P.O. Box 392, Boston, MA 01740-0392, who held 903 Class C
shares of the Massachusetts Series (65.9%); Clayton J. Lanning, The Clayton J
Lanning Trust, 6230 Ridge Drive #34, Benzonia, MI 49616-9606 who held 41,129
Class A shares of the Michigan Series (10.6%); Steiger Lumber Co, Business
Office, P.O. Box 200, Bessemer, MI 49911-0200, who held 50,953 Class A shares of
the Michigan Series (13.2%); Paul W. Steiger & Dorothy Steiger, 1000 East Iron
St, Bessemer, MI 49911-1225, who held 22,328 Class A shares of the Michigan
Series (5.8%); Lester L. Fall Jr & Cynthia D. Fall, 12460 Lincoln, Burt, MI
48417-9746, who held 1,309 Class C shares of the Michigan Series (98.7%);
Kenneth K. & Helen M. Neitzel, 6313 St Johns Ave, Edina, MN 55424-1857, who held
4,764 Class A shares of the Minnesota Series (5.3%); Patricia A. Noterman, 10824
Harrison Ave, Bloomington, MN 55437-2922, who held 5,593 Class A shares of the
Minnesota Series (6.3%); Darlene J. Castleman, 253 Lely Bch Blvd, Bldg I-604,
Bonita Springs, FL 33923-8556, who held 6,028 Class A shares of the Minnesota
Series (6.7%); Edna Lakour, 1425 N ST Albans, ST Paul, MN 55117-4146, who held
4,543 Class A shares of the Minnesota Series (5.1%); Prudential Mutual Fund Svcs
Audit Account, P.O. Box 15025, New Brunswick, NJ 08906-5025, which held 17 Class
C shares of the Minnesota Series (98.1%); Mr. Burton Kreisworth, 1847
Greenwillows Drive, Vineland, NJ 08360-6095, who held 3,471 Class C shares of
the New Jersey Series (9.0%); Robert A. Press, 140 Hepburn Rd., Apt 12D,
Clifton, NJ 07012-2231, who held 4,688 Class C shares of the New Jersey Series
(12.2%); Steve Yacus & Olga Yacus, 91 Old Mountain Rd, Lebanon, NJ 08833-4204,
who held 2,377 Class C shares of the New Jersey Series (6.2%); Mrs. Susan C.
Gardner, Blue Mill Road, Morristown, NJ 07960, who held 4,678 Class C shares of
the New Jersey Series (12.2%); Irene Sicora & John Sicora, 21 Eastern
B-26
<PAGE>
States PKY, Somerville, NJ 08876-2630, who held 2,240 Class C shares of the New
Jersey Series (5.8%); Vivian Piccioni, 29 Elmwood Ave, Vineland, NJ 08360-4112,
who held 2,833 Class C shares of the New Jersey Series (7.4%); Antonio
Cristofano & Maria Cristofano, 9 Floyd Dr, Totowa, NJ 07512-1705, who held 2,475
Class C shares of the New Jersey Series (6.4%); Richard A. Sperling MD, 25
Sparrowbush Rd, Upper Saddle, NJ 07458-1411, who held 7,502 Class C shares of
the New Jersey Series (19.5%); Dolores Truex, 126 Mayetta Landing Rd, West
Creek, NJ 08902-3100, who held 1,963 Class C shares of the New Jersey Series
(5.1%); Mr. Jerome Roth, 1714 Ave M, Brooklyn, NY 11230-5300, who held 96,921
Class A shares of the New York Series (8.7%); Vincent J. Demilia & Danielle M.
Demilia, 108 Camille LN, East Patchogue, NY 11772-4625, who held 2,145 Class C
shares of the New York Series (7.3%); Kandala K. Chary MD & Vaidehi Chary, 99
Roxbury Pk, East Amherst, NY 14051-1769, who held 3,041 Class C shares of the
New York Series (10.4%); Shelley Fehrenbach, 2 Cherry Lane, Kings Point, NY
11024-1122, who held 4,494 Class C shares of the New York Series (15.4%);
Suzanne E. Tyo & Carol Ann Tyo, 14 Maple Ave, Shortsville, NY 14548-9316, who
held 2,607 Class C shares of the New York Series (8.9%); Hannah B. Falk,
Parklane Apts, 33 Gates Circle, Buffalo, NY 14209-1138, who held 2,639 Class C
shares of the New York Series (9.0%); Carol Ann Tyo & Suzanne E. Tyo, 14 Maple
Ave, Shortsville, NY 14548-9316, who held 1,773 Class C shares of the New York
Series (6.1%); Mark A. Pieczonka & Catherine A. Pieczonka, 18 Monet Place, Green
Lawn, NY 11740-1910, who held 9,057 Class C shares of the New York Series
(31.0%); Mr. Jerome C. Procton, 210 Staunton Drive, Greensboro, NC 27410-6065,
who held 32,427 Class A shares of the North Carolina Series (16.2%); Foster M.
Ferguson, Route 3 Box 127, Clyde, NC 28721-9514, who held 10,771 Class A shares
of the North Carolina Series (5.4%); Clarance C. Corrill, Prudential Emp. Nav,
15 Scott Ln, Etowah, NC 28729-9720, who held 12,391 Class A shares of the North
Carolina Series (6.2%); Howard G. Hochman, 2917 Beech Grove Dr, Durham, NC
27705-1601, who held 919 Class C shares of the North Carolina Series (98.1%);
Willaim B. Michael Tr UW of Ann B Michael, Mary L. Michael and Robert J. Hunt,
Co Trustees, C/O Robert J. Hunt, 2200 Corporate Blvd NW STE 401, Boca Raton, FL
33431-7369, who held 19,872 Class A shares of the Ohio Series (5.3%); Robert M.
Beck, 339 Walnut Creek Pike, Circleville, OH 43113-1051, who held 459 Class C
shares of the Ohio Series (81.5%); Dian Yan Lee & Diana Z. Lee, 1097 Fanwood Ct,
Painesville, OH 44077-5440, who held 87 Class C shares of the Ohio Series
(15.5%); Harman H. Rogers & Bessie P. Rogers, 1220 Pottstown Pike, West Chester,
PA 19380-3936, who held 88,691 Class A shares of the Pennsylvania Series (7.9%);
Dale R. Inman & Diane S. Inman, 300 High St, Troy, PA 16947-1114, who held 4,864
Class C shares of the Pennsylvania Series (32.4%); Barry L. Joel & Tammy L.
Joel, 7386 Beacon Hill Dr, Pittsburgh, PA 15221-2569, who held 3,888 Class C
shares of the Pennsylvania Series (25.9%); Doris Zimmerman, 1401 Plymouth Dr,
Irwin, PA 15642-4089, who held 1,957 Class C shares of the Pennsylvania Series
(13.0%); Robert D. Mason & Diane Mason, 177 Cherry St, Bellefonte, PA
16823-8205, who held 974 Class C shares of the Pennsylvania Series (6.5%);
Mercedes E. Donohoe, 233 W 3rd St, Mt Carmel, PA 17851, who held 978 Class C
shares of the Pennsylvania Series (6.5%); and Mary Ann Monticue, Rd 1 Box 290A,
Mt. Pleasant, PA 15666-9718, who held 1,469 Class C shares of the Pennsylvania
Series (9.8%).
B-27
<PAGE>
As of December 2, 1994, Prudential Securities was the record holder for
other beneficial owners of the following shares of the series, representing the
percentage shown of the outstanding shares of each such series:
<TABLE>
<CAPTION>
SERIES CLASS A CLASS B* CLASS C
------------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Arizona.................. 602,782 (92%) 2,848,099 (65%) 874 (98%)
Florida.................. 10,987,955 (85%) 269,997 (92%) 991,128 (92%)
Georgia.................. 83,873 (83%) 837,337 (51%) 0 (0%)
Hawaii Income............ 32,757 (16%) 346,122 (93%) 27,817 (97%)
Maryland................. 123,373 (54%) 2,781,924 (62%) 9,636 (88%)
Massachusetts............ 133,584 (67%) 2,446,937 (51%) 1,352 (99%)
Michigan................. 279,776 (72%) 2,799,036 (50%) 0 (0%)
Minnesota................ 16,192 (18%) 575,780 (29%) 0 (0%)
New Jersey............... 923,036 (71%) 22,866,195 (83%) 35,014 (91%)
New York................. 832,035 (74%) 17,195,084 (63%) 29,205 (99%)
North Carolina........... 133,771 (67%) 4,503,398 (74%) 919 (98%)
Ohio..................... 223,041 (59%) 5,167,323 (53%) 0 (0%)
Pennsylvania............. 475,841 (43%) 11,128,534 (46%) 8,752 (58%)
<FN>
- --------------
</TABLE>
As of December 2, 1994, Prudential Securities was the record holder for
other beneficial owners of 53,212,643 shares (or 98% of those outstanding) of
the Connecticut Money Market Series, 42,460,879 shares (or 99% of those
outstanding) of the Massachusetts Money Market Series, 162,283,457 shares (or
98% of those outstanding) of the New Jersey Money Market Series and 270,056,954
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, 1994,
PMF managed and/or administered open-end and closed-end management investment
companies with assets of approximately $47 billion. According to the Investment
Company Institute, as of April 30, 1994, the Prudential Mutual Funds were the
12th largest family of mutual funds in the United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian), the Fund's custodian, and
Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent), the Fund's
transfer and dividend disbursing agent. The management services of PMF for the
Fund are not exclusive under the terms of the Management Agreement and PMF is
free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF
B-28
<PAGE>
will be paid by PMF to the Fund. No such reductions were required during the
fiscal year ended August 31, 1994. 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 Investment Company Act, on May 4, 1994 and by
shareholders of each series of the Fund then in existence on December 28, 1988,
by shareholders of the Florida Series and the New Jersey Money Market Series on
December 30, 1991, 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.
B-29
<PAGE>
The amount of the management fee paid by each series of the Fund to PMF for
the fiscal years ended August 31, 1992, 1993 and 1994 was as follows:
<TABLE>
<CAPTION>
1992 1993 1994*
----------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona................................................................ $ 276,179 $ 286,344 $ 313,334
Connecticut Money Market............................................... -- (a) -- (a) 63,440(a)
Florida................................................................ 72,385(b) 247,845(b) 311,558(b)
Georgia................................................................ 87,957 94,559 108,130
Maryland............................................................... 260,251 279,241 290,509
Massachusetts.......................................................... 256,886 286,520 310,614
Massachusetts Money Market............................................. -- (c) -- (c) 44,800(c)
Michigan............................................................... 266,860 319,163 383,005
Minnesota.............................................................. 121,648 130,014 136,463
New Jersey............................................................. 646,032(d) 1,236,812(d) 1,347,284(d)
New Jersey Money Market................................................ 81,075(e) 523,804(e) 634,767(e)
New York............................................................... 1,535,202 1,697,889 1,820,106
New York Money Market.................................................. 1,242,784 1,378,198 1,402,462
North Carolina......................................................... 306,815 346,561 378,373
Ohio................................................................... 487,606 564,784 630,490
Pennsylvania........................................................... 952,761 1,186,546 1,384,548
<FN>
- ------------------------
* The Hawaii Income Series commenced investment operations on September 19,
1994.
(a) PMF voluntarily waived all or a portion of its management fee of $169,818,
$265,760 and $243,395, respectively.
(b) PMF voluntarily waived all or a portion of its management fee of $342,080,
$371,767 and $467,337, respectively.
(c) PMF voluntarily waived all or a portion of its management fee of $77,383,
$161,228 and $167,335, respectively.
(d) PMF voluntarily waived all or a portion of its management fee of $749,352,
$412,271 and $449,095, respectively.
(e) PMF voluntarily waived all or a portion of its management fee of $698,502,
$323,145 and $211,404, respectively.
</TABLE>
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 4,
1994, by shareholders of each series of the Fund then in existence on December
28, 1988, by shareholders of the Florida Series and the New Jersey Money Market
Series on December 30, 1991, 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.
B-30
<PAGE>
The Manager and the Subadviser are subsidiaries of The Prudential Insurance
Company of America (Prudential) which, as of December 31, 1993, is one of the
largest financial institutions in the world and the largest insurance company in
North America. Prudential has been engaged in the insurance business since 1875.
In July 1994, INSTITUTIONAL INVESTOR ranked Prudential the second largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1993.
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 compensation type plans. Also on May 6,
1993, the Trustees, including a majority of the Rule 12b-1 Trustees, approved a
plan of distribution (the Florida Series' Class C Plan) for the Florida Series'
Class D shares (now called Class C shares). The Plans were last approved by the
Trustees, including a majority of the Rule 12b-1 Trustees, on May 4, 1994
(August 17, 1994 with respect to the Hawaii Income Series). 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.
B-31
<PAGE>
CLASS A PLAN. For the fiscal year ended August 31, 1994, PMFD received the
following payments under the Class A Plan:
<TABLE>
<CAPTION>
SERIES
- ----------------------------------------------------------------------------------
<S> <C>
Arizona........................................................................... $ 7,141
Florida........................................................................... 11,593
Georgia........................................................................... 1,134
Maryland.......................................................................... 2,877
Massachusetts..................................................................... 2,578
Michigan.......................................................................... 4,506
Minnesota......................................................................... 1,179
New Jersey........................................................................ 15,334
New York.......................................................................... 13,454
North Carolina.................................................................... 2,067
Ohio.............................................................................. 4,733
Pennsylvania...................................................................... 10,315
</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, 1994, PMFD also received approximate initial sales charges
with respect to the sale of Class A shares of the series as follows:
<TABLE>
<CAPTION>
SERIES
- --------------------------------------------------------------------------------
<S> <C>
Arizona......................................................................... $ 63,200
Florida......................................................................... 880,300
Georgia......................................................................... 13,200
Maryland........................................................................ 27,000
Massachusetts................................................................... 35,100
Michigan........................................................................ 47,900
Minnesota....................................................................... 20,000
New Jersey...................................................................... 94,600
New York........................................................................ 166,000
North Carolina.................................................................. 26,500
Ohio............................................................................ 72,700
Pennsylvania.................................................................... 126,400
</TABLE>
B-32
<PAGE>
CLASS B PLAN. For the fiscal year ended August 31, 1994, 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 series as set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
CONTINGENT
DEFERRED
SERIES AMOUNT OF FEE SALES CHARGES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Arizona........................................................ $ 277,628 $ 76,800
Florida........................................................ 47 --
Georgia........................................................ 102,458 29,000
Maryland....................................................... 276,113 64,000
Massachusetts.................................................. 297,719 89,800
Michigan....................................................... 360,476 95,800
Minnesota...................................................... 130,567 41,900
New Jersey..................................................... 1,719,706 447,600
New York....................................................... 1,752,818 336,000
North Carolina................................................. 368,035 64,600
Ohio........................................................... 606,826 96,400
Pennsylvania................................................... 1,332,972 365,000
</TABLE>
For the fiscal year ended August 31, 1994, it is estimated that Prudential
Securities spent approximately the following amounts on behalf of the series of
the Fund:
<TABLE>
<CAPTION>
COMPENSATION APPROXIMATE
PRINTING AND COMMISSION TO PRUSEC* FOR TOTAL
MAILING PAYMENTS TO COMMISSION AMOUNT
PROSPECTUSES INTEREST FINANCIAL PAYMENTS TO SPENT BY
TO OTHER AND ADVISERS OF OVERHEAD COSTS REPRESENTATIVES DISTRIBUTOR
THAN CURRENT CARRYING PRUDENTIAL OF PRUDENTIAL AND OTHER ON BEHALF OF
SERIES SHAREHOLDERS CHARGES SECURITIES SECURITIES** EXPENSES** SERIES
- -------------------- ------------ -------- ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Arizona............. $ 10,000 $ 52,300 $ 124,300 $ 123,400 $ 39,500 $ 349,500
Florida............. -- -- 15,300 600 -- 15,900
Georgia............. 18,100 30,300 42,500 31,800 25,700 148,400
Maryland............ 17,400 46,100 94,100 72,600 70,200 300,400
Massachusetts....... 13,000 54,500 103,900 75,500 111,100 358,000
Michigan............ 11,300 78,700 180,200 136,900 155,000 562,100
Minnesota........... 10,600 35,000 38,400 6,000 87,900 177,900
New Jersey.......... 34,800 355,400 765,100 649,700 305,300 2,110,300
New York............ 41,900 311,900 685,200 538,100 442,400 2,019,500
North Carolina...... 15,500 73,600 165,900 127,500 78,100 460,600
Ohio................ 14,800 109,700 238,000 178,000 251,600 792,100
Pennsylvania........ 24,900 260,900 513,300 344,700 959,900 2,103,700
<FN>
- ------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
</TABLE>
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 period August 1, 1994 (inception of Class C shares
for series other than the Florida Series) through August 31, 1994, 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 series as set
forth below:
<TABLE>
<CAPTION>
APPROXIMATE
CONTINGENT
DEFERRED
SALES
SERIES AMOUNT OF FEE CHARGES
- -------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Arizona....................................................... $ -- $ --
Florida....................................................... 69,602 --
Georgia....................................................... -- --
Maryland...................................................... 18 --
Massachusetts................................................. -- --
Michigan...................................................... -- --
Minnesota..................................................... -- --
New Jersey.................................................... -- --
New York...................................................... 25 --
North Carolina................................................ -- --
Ohio.......................................................... -- --
Pennsylvania.................................................. -- --
</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 4, 1994.
The Plans provide that they shall continue in effect from year to year with
respect to each series, provided such continuance is approved annually by a vote
of the Trustees of the Fund in the manner described above. The Plans may not be
amended to increase materially the amount to be spent for the services described
therein without approval of the shareholders of the applicable class (by both
Class A and Class B shareholders, voting separately, in the case of material
amendments to the Class A Plan), and all material amendments are required to be
approved by the Trustees in the manner described above. Each Plan may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Rule 12b-1 Trustees, or by a vote of a majority of the outstanding voting
securities of the applicable class on not more than 60 days' nor less than 30
days' written notice to any other party to the Plans. Each Plan will
automatically terminate in the event of its assignment. The Fund will not be
contractually obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities and PMFD to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. The
Distribution Agreements were last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on May 4, 1994 (August 17, 1994 with respect to the
Hawaii Income Series).
The Connecticut Money Market, Massachusetts Money Market, New Jersey Money
Market, and the New York Money Market Series' Plan of Distribution (the Money
Market Plan) was last approved by the Trustees of the Fund, including a majority
of the Rule 12b-1 Trustees, at a meeting called for the purpose of voting on the
Money Market Plan, on May 4, 1994. The Money Market Plan was approved by
shareholders of the New York Money Market Series on December 28, 1988, by
shareholders of the New Jersey Money Market Series on
B-34
<PAGE>
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, 1994, 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................................................................. $ 75,743
Massachusetts Money Market............................................................... 53,034
New Jersey Money Market.................................................................. 211,404
New York Money Market.................................................................... 350,615
</TABLE>
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of 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.
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 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
B-35
<PAGE>
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.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures and options thereon for each series of the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions. The term "Manager" as used in this
section includes the Subadviser. Purchases and sales of securities on a
securities exchange, which are not expected to be a significant portion of the
portfolio securities of any series, are effected through brokers who charge a
commission for their services. Broker-dealers may also receive commissions in
connection with options and futures transactions, including the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Thus it will not deal in over-the-counter securities with Prudential Securities
acting as a market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities' acting as
principal with respect to any part of the Fund's order.
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
B-36
<PAGE>
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.
During the fiscal years ended August 31, 1994, 1993 and 1992, 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 1994* 1993 1992
- ------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Arizona....................................................................... $ 2,363 $ 1,820 $ 2,678
Connecticut Money Market...................................................... 0 0 0
Florida....................................................................... 4,113 2,013 2,835
Georgia....................................................................... 875 175 140
Maryland...................................................................... 613 437 88
Massachusetts................................................................. 263 613 53
Massachusetts Money Market.................................................... 0 0 0
Michigan...................................................................... 2,030 3,623 1,908
Minnesota..................................................................... 735 525 1,190
New Jersey.................................................................... 875 0 0
New Jersey Money Market....................................................... 0 0 0
New York...................................................................... 0 2,415 2,258
New York Money Market......................................................... 0 0 0
North Carolina................................................................ 175 875 350
Ohio.......................................................................... 4,953 1,418 3,728
Pennsylvania.................................................................. 875 2,468 1,523
<FN>
- --------------
*The Hawaii Income Series was not in existence during the fiscal year ended
August 31, 1994.
</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).
B-37
<PAGE>
See "Shareholder Guide--How to Buy Shares of the Fund" in each series'
Prospectus. The series (other than the money market series and the New York
Income Series) issue three classes of shares, designated Class A, Class B and
Class C shares. Class C shares of the Florida Series were formerly called Class
D shares.
Each class of shares represents an interest in the same portfolio of
investments of the series and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
For a description of the methods of purchasing shares of the Connecticut
Money Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series or the New York Money Market Series, see "Shareholder Guide--How
to Buy Shares of the Fund" in the money market series' Prospectuses.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at 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, 1994 of each series then in existence (other than the Connecticut
Money Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series and the New York Money Market Series), the maximum offering price
of the series' shares is as follows:
<TABLE>
<CAPTION>
CLASS A AZ FL GA MD MA MI MN NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value and redemption price per
Class A share.......................... $11.59 $ 9.91 $11.19 $10.66 $11.37 $11.75 $11.56 $10.81 $11.71 $11.06 $11.72 $10.42
Maximum sales charge (3% of offering
price)................................. .36 .31 .35 .33 .35 .36 .36 .33 .36 .34 .36 .32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Offering price to public................ $11.95 $10.22 $11.54 $10.99 $11.72 $12.11 $11.92 $11.14 $12.07 $11.40 $12.08 $10.74
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS B AZ FL GA MD MA MI MN NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class B
share*................................. $11.58 $ 9.91 $11.19 $10.67 $11.36 $11.75 $11.56 $10.81 $11.71 $11.06 $11.73 $10.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS C AZ FL GA MD MA MI MN NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class C
share*................................. $11.58 $ 9.91 $11.19 $10.67 $11.36 $11.75 $11.56 $10.81 $11.71 $11.06 $11.73 $10.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<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;
B-38
<PAGE>
(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.
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
B-39
<PAGE>
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.
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.
B-40
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a series. An investor
may direct the Transfer Agent in writing by the first business day of the month
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at net asset value (without a sales charge) by returning the check
or the proceeds to the Transfer Agent within 30 days after the payment date. The
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholder will
receive credit for any contingent deferred sales charge paid in connection with
the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each series makes available to its shareholders the privilege of exchanging
their shares of a series for shares of other series of the Fund and certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential Mutual Funds may also be exchanged for
shares of the Fund. All exchanges are made on the basis of relative net asset
value next determined after receipt of an order in proper form. An exchange will
be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of other series of the Fund or certain other Prudential Mutual
Funds, shares of Prudential Government Securities Trust (Intermediate Term
Series) and shares of the money market funds specified below. No fee or sales
load will be imposed upon the exchange. Shareholders of money market funds who
acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of each series may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of other series
of the Fund or certain other Prudential Mutual Funds and shares of Prudential
Special Money Market Fund, a money market fund. No CDSC will be payable upon
such exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a 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
B-41
<PAGE>
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month.Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of a series, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C Exchange Privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
DOLLAR COST AVERAGING (NOT APPLICABLE TO THE MONEY MARKET SERIES)
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.......................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................... 176 264 352 440
15 Years.......................................... 296 444 592 740
10 Years.......................................... 555 833 1,110 1,338
5 Years.......................................... 1,371 2,057 2,742 3,428
<FN>
See "Automatic Savings Accumulation Plan."
- ------------------------
(1)Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992, The National Center for Educational Statistics and
the U.S. Department of Education. Average costs for private institutions include
tuition, fees, room and board.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
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.
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
B-44
<PAGE>
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 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
B-45
<PAGE>
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, 1994 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>
Arizona............. 4.5% -- 4.3% -- -- --
Florida............. 5.7% 5.3% -- -- 5.2% 4.9%
Georgia............. 4.0% -- 3.8% -- -- --
Maryland............ 4.8% -- 4.5% -- -- --
Massachusetts....... 4.7% -- 4.5% -- -- --
Michigan............ 4.6% -- 4.3% -- -- --
Minnesota........... 4.1% -- 3.8% -- -- --
New Jersey.......... 5.1% 4.8% 4.8% 4.7% -- --
New York............ 4.9% -- 4.7% -- -- --
North Carolina...... 4.7% -- 4.5% -- -- --
Ohio................ 4.7% -- 4.4% -- -- --
Pennsylvania........ 5.0% -- 4.8% -- -- --
</TABLE>
The Hawaii Income Series commenced investment operations on September 19,
1994.
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 then added to the portion of
the yield that is attributable to other securities. For the 30 days ended August
31, 1994, the tax equivalent yield (assuming a federal tax rate of 36%) and the
tax equivalent yield without the management subsidies and waivers were as
follows:
<TABLE>
<CAPTION>
CLASS A CLASS B 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>
Arizona....... 7.5% -- 7.1% -- -- --
Florida....... 8.9% 8.3% -- -- 8.2% 7.7%
Georgia....... 6.7% -- 6.3% -- -- --
Maryland...... 7.9% -- 7.5% -- -- --
Massachusetts... 8.4% -- 8.0% -- -- --
Michigan...... 7.5% -- 7.1% -- -- --
Minnesota..... 7.0% -- 6.5% -- -- --
New Jersey.... 8.5% 8.1% 8.1% 7.9% -- --
New York...... 8.3% -- 7.9% -- -- --
North
Carolina..... 8.0% -- 7.6% -- -- --
Ohio.......... 7.9% -- 7.5% -- -- --
Pennsylvania... 8.1% -- 7.7% -- -- --
</TABLE>
The Hawaii Income Series commenced investment operations on September 19,
1994.
B-46
<PAGE>
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 series (other than the money market series) for the periods
ended August 31, 1994 were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------- -------------------------------------------------------------------
SUBSIDY/WAIVER SUBSIDY/WAIVER
ADJUSTED ADJUSTED
-------------------- ----------------------------------
ONE FROM ONE FROM ONE FIVE FROM ONE FIVE FROM
SERIES YEAR INCEPTION YEAR INCEPTION YEAR YEARS INCEPTION YEAR YEARS INCEPTION
- --------------- ------ ----------- ------ ----------- ------ ------- ----------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona........ -3.6% 7.0% -3.6% 7.0% -6.1% 7.1% 8.5% -6.1% 7.1% 8.5%
Florida........ -4.6% 7.45% -4.6% 6.9% -5.1% -- -5.1% -5.1% -- -5.1%
Georgia........ -4.5% 6.6% 4.5% 6.6% -7.0% 6.7% 8.6% -7.0% 6.72% 8.42%
Maryland....... -4.7% 6.3% -4.7% 6.3% -7.1% 6.4% 7.3% -7.1% 6.4% 7.3%
Massachusetts... -3.6% 7.1% -3.6% 7.1% -6.2% 7.0% 8.0% -6.2% 7.0% 7.9%
Michigan....... -3.4% 7.0% -3.4% 7.0% -5.8% 7.1% 8.8% -5.8% 7.0% 8.8%
Minnesota...... -3.5% 6.0% -3.5% 6.0% -5.9% 6.1% 8.0% -5.9% 6.1% 7.8%
New Jersey..... -4.2% 7.5% -4.2% 7.5% -6.7% 7.6% 8.1% -6.7% 7.6% 7.9%
New York....... -4.3% 7.4% -4.3% 7.4% -6.8% 7.3% 8.7% -6.8% 7.3% 8.7%
North
Carolina...... -4.3% 6.6% -4.3% 6.6% -6.9% 6.7% 7.7% -6.8% 6.7% 7.7%
Ohio........... -3.0% 7.2% -3.0% 7.2% -5.3% 7.3% 8.4% -5.3% 7.3% 8.4%
Pennsylvania... -3.8% 7.0% -3.8% 7.0% -6.2% 7.3% 7.0% -6.2% 7.3% 7.0%
<CAPTION>
CLASS C
-------------
FROM
SERIES INCEPTION
- --------------- -------------
<S> <C>
Arizona........ -10.4%
Florida........ .6%
Georgia........ -12.1%
Maryland....... -10.7%
Massachusetts.. -12.8%
Michigan....... -10.9%
Minnesota...... -11.9%
New Jersey..... -10.0%
New York....... -10.9%
North
Carolina...... -11.3%
Ohio........... -10.0%
Pennsylvania... -10.0%
</TABLE>
During these periods, no shares of the Hawaii Income Series were
outstanding.
AGGREGATE TOTAL RETURN. Each series of the Fund may also advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B and Class C shares. See "How the Fund Calculates Performance"
in the Prospectus of each applicable series.
Aggregate total return represents the cumulative change in the value of an
investment in a series of the Fund and is computed according to the following
formula:
ERV-P
------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods of a hypothetical $1,000 payment made at the beginning
of the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-47
<PAGE>
The aggregate total return for each series for the one year, five year and
since inception periods ended August 31, 1994 for the Class A, Class B and Class
C shares of each series were as follows:
<TABLE>
<CAPTION>
CLASS C
CLASS A CLASS B --------------------------
---------------------------------- ------------------------------------------
AGGREGATE
AGGREGATE TOTAL AGGREGATE TOTAL TOTAL
RETURN RETURN RETURN
----------------- ------------------------- ---------
SINCE SINCE SINCE
SERIES 1 YR. INCEPTION INCEPTION DATE 1 YR. 5 YR. INCEPTION INCEPTION DATE INCEPTION INCEPTION DATE
- -------------------- ----- --------- -------------- ----- ----- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona............. -0.6% 40.5% 1/22/90 -1.1% 41.5% 126.1% 9/24/84 0.1% 8/1/94
Florida............. -1.7% 34.3% 12/27/90 N/A N/A -0.1% 8/1/94 0.7% 8/1/94
Georgia............. -1.6% 38.3% 1/22/90 -2.0% 39.4% 127.0% 9/25/84 -0.1% 8/1/94
Maryland............ -1.8% 36.9% 1/22/90 -2.1% 37.3% 96.7% 1/22/85 0.1% 8/1/94
Massachusetts....... -0.6% 41.2% 1/22/90 -1.2% 41.5% 114.2% 9/19/84 -0.1% 8/1/94
Michigan............ -0.4% 40.7% 1/22/90 -0.8% 41.5% 132.1% 9/19/84 0.4% 8/1/94
Minnesota........... -0.9% 34.8% 1/22/90 -1.3% 35.5% 114.7% 9/19/84 0.0% 8/1/94
New Jersey.......... -1.3% 43.6% 1/22/90 -1.7% 44.9% 66.4% 3/1/88 0.1% 8/1/94
New York............ -1.4% 38.6% 1/22/90 -1.8% 43.0% 129.0% 9/27/84 0.1% 8/1/94
North Carolina...... -1.3% 38.6% 1/22/90 -1.8% 39.2% 103.7% 2/13/85 0.0% 8/1/94
Ohio................ 0.0% 42.1% 1/22/90 -0.3% 43.1% 123.6% 9/19/84 0.2% 8/1/94
Pennsylvania........ -0.8% 41.1% 1/22/90 -1.2% 43.0% 66.1% 3/6/87 0.1% 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, 1994 was 3.6%, 4.1%, 4.2%
and 3.8%, respectively.
Comparative performance information may be used from time to time in
advertising or marketing the money market series' shares, including data from
Lipper Analytical Services, Inc., 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.
B-48
<PAGE>
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
[GRAPHIC]
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
All of the Fund's net investment income is declared as a dividend each
business day. Shares will begin earning dividends on the day following the date
on which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn dividends until they are redeemed.
Unless the shareholder elects (by notice to the Dividend Disbursing Agent by the
first business day of the month) to receive monthly cash payments of dividends,
such dividends will be automatically received in additional
series shares monthly at net asset value on the payable date. In the event an
investor redeems all the shares in his or her account at any time during the
month, all dividends declared to the date of redemption will be paid to him or
her at the time of the redemption. The Fund's net investment income on weekends,
holidays and other days on which the Fund is closed for business will be
declared as a dividend on shares outstanding on the close of the last business
day on which the Fund was open for business. Accordingly, a shareholder who
redeems his or her shares effective as of 4:15 P.M. (4:30 P.M. for the money
market series), New York time, on a Friday earns a dividend which reflects the
income earned by the Fund on the following Saturday and Sunday. On the other
hand, an investor whose purchase order is effective as of 4:15 P.M. (4:30 P.M.
for the money market series), New York time, on a Friday does not begin earning
dividends until the following business day. Net investment income consists of
interest income accrued on portfolio securities less all expenses, calculated
daily.
Net realized capital gains, if any, will be distributed annually and, unless
the shareholder elects to receive them in cash, will be automatically received
in additional shares of a series.
The per share dividends on Class B shares and Class C shares of a series
will be lower than the per share dividends on Class A shares of the series as a
result of the higher distribution-related fee applicable to the Class B and
Class C shares. The per share distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B and Class C shares. See "Net
Asset Value."
B-49
<PAGE>
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 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
B-50
<PAGE>
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, 1994, the following series had capital loss
carryforwards for federal tax purposes as follows:
<TABLE>
<CAPTION>
CAPITAL LOSS
SERIES CARRYFORWARD EXPIRES
- ----------------------------------------------------------------- ------------- -----------
<S> <C> <C>
New York......................................................... $ 15,700 1999
------------- -----
Ohio............................................................. 279,400 1996
------------- -----
</TABLE>
If any net long-term capital gains in excess of net short-term capital
losses are retained by a series for investment, requiring federal income taxes
to be paid thereon by the series, the series will elect to treat such capital
gains as having been distributed to shareholders. As a result, shareholders will
be taxed on such amounts as long-term capital gains, will be able to claim their
proportionate share of the federal income taxes paid by the series on such gains
as a credit against their own federal income tax liabilities, and will be
entitled to increase the adjusted tax basis of their shares in such series by
the differences between their PRO RATA share of such gains and their tax credit.
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any series of the
Fund for the taxable year are not subject to federal income tax (except for
possible application of the alternative minimum tax). Interest from certain
private activity and other bonds is treated as an item of tax preference for
purposes of the 28% alternative minimum tax on individuals and the 20%
alternative minimum tax on corporations. To the extent interest on such bonds is
distributed to shareholders of any series of the Fund, shareholders will be
subject to the alternative minimum tax on such distributions.
Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of the series have been held
by such shareholders. Such distributions are not eligible for the dividends
received deduction. Distributions of long-term capital gains of the series are
includable in income and may also be subject to the alternative minimum tax.
Any short-term capital loss realized upon redemption of shares within six
months (or such shorter period as may be established by Treasury regulations)
from the date of purchase of such shares and following receipt of an
exempt-interest dividend will be disallowed to the extent of such tax-exempt
dividend. Any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution will be treated as long-term capital loss to the extent of
such long-term capital gains distribution and to the extent not disallowed under
the preceding sentence.
B-51
<PAGE>
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 capital
gains distributions unless it is reasonably expected that at least 95% of the
distributions of the series are comprised of tax-exempt interest. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Investors may wish to consult their tax advisers about
the applicability of the backup withholding provisions.
STATE TAXATION
The following discussion assumes that each series of the Fund qualified for
each taxable year as a regulated investment company for federal tax purposes.
ARIZONA. In the opinion of Arizona tax counsel, individual shareholders
resident in Arizona and corporate shareholders of the Arizona Series will not be
subject to Arizona income tax on distributions received from the Series to the
extent that such distributions are attributable to interest on tax-exempt
obligations of the State of Arizona and its political subdivisions or on
obligations issued by the Governments of Puerto Rico, the Virgin Islands and
Guam, provided that the Arizona Series complies with the requirement of the
Internal Revenue
B-52
<PAGE>
Code that at least 50% of the value of its assets at the close of each quarter
of its taxable year is invested in state, municipal or other obligations the
interest on which is exempt from federal income tax under Section 103(a) of the
Internal Revenue Code.
Other distributions from the Arizona Series, including those related to
long-term and short-term capital gains, will generally not be exempt from
Arizona income tax.
Shares of the Arizona Series will not be subject to the Arizona personal
property tax.
Shareholders of the Arizona Series should consult their tax advisers about
other state and local tax consequences of their investments in the Arizona
Series.
CONNECTICUT. Distributions from the Connecticut 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.
Provided that the Florida Series will not possess any tangible personal
property physically located within Florida, in the opinion of Florida counsel
the shareholders of the Florida Series will not be subject to Florida state or
local tangible personal property taxes on their shares.
Shareholders of the Florida Series should consult their tax advisers about
other state and local tax consequences of their investments in the Florida
Series.
GEORGIA. In the opinion of Georgia tax counsel, shareholders of the Georgia
Series will not be subject to Georgia income taxes on distributions from the
Georgia Series to the extent that such distributions represent "exempt-interest
dividends" for federal income tax purposes that are attributable to
interest-bearing obligations issued by or on behalf of the State of Georgia or
its political subdivisions, or by the governments of Puerto Rico, the Virgin
Islands, or Guam. Distributions, if any, derived from capital gains or other
sources generally will be taxable to shareholders of the Georgia Series for
Georgia income tax purposes. For purposes of the Georgia intangibles tax, shares
of the Georgia Series likely are taxable (at the rate of 10 cents per $1,000 in
value) to shareholders who are otherwise subject to such tax.
Shareholders of the Georgia Series should consult their tax advisers about
other state and local tax consequences of their investments in the Georgia
Series.
B-54
<PAGE>
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.
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 gains realized on the sale or exchange of bonds issued by the
State of Maryland or its political subdivisions will not be subject to Maryland
State and local income taxes. Other distributions from the Maryland Series will
generally not be exempt from Maryland State and local income taxes.
Shares of the Maryland Series will not be subject to the Maryland personal
property tax.
Shareholders of the Maryland Series should consult their tax advisers about
other state and local tax consequences of their investments in the Maryland
Series.
MASSACHUSETTS. In the opinion of Massachusetts tax counsel, if the
Massachusetts Series and the Massachusetts Money Market Series each qualify as
regulated investment companies, (1) individual and other noncorporate
shareholders of each Series resident in Massachusetts will not be subject to
Massachusetts personal income tax on distributions received from such Series to
the extent such distributions are attributable to interest on tax-exempt
obligations of the Commonwealth of Massachusetts and its political subdivisions
and instrumentalities provided that such Series complies with the requirement
that at least 50% of the value of its assets at the close of each quarter of its
taxable year be invested in state, municipal or other obligations, the interest
on which is excluded from gross income for federal income tax purposes under
Section 103(a) of the Internal Revenue Code; (2) such shareholders will not be
subject to Massachusetts personal income tax on distributions received from
either of such Series to the extent such distributions are attributable to
interest on obligations issued by the Governments of Puerto Rico, the Virgin
Islands or Guam; and (3) such shareholders will not be subject to Massachusetts
personal income tax on capital gain dividends received from either of such
Series to the extent such capital gain dividends are attributable to long-term
capital gains realized on the sale or 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.
B-55
<PAGE>
Other distributions from the Massachusetts Series and the Massachusetts
Money Market Series will generally not be exempt from Massachusetts personal
income tax.
Massachusetts Series and the Massachusetts Money Market Series distributions
will not be excluded from net income of corporations and shares of the
Massachusetts Series and the Massachusetts Money Market Series will not be
excluded from the net worth of intangible property corporations in determining
the Massachusetts excise tax on corporations.
Shares of the Massachusetts Series and the Massachusetts Money Market Series
will not be subject to Massachusetts local property taxes.
Shareholders of the Massachusetts Series and the Massachusetts Money Market
Series should consult their tax advisers about other state and local tax
consequences of their investments in the Massachusetts Series and the
Massachusetts Money Market Series.
MICHIGAN. Individual shareholders of the Michigan Series residing in
Michigan will not be subject to Michigan personal income tax or personal income
taxes imposed by cities in Michigan, and corporate shareholders will not be
subject to the Michigan single business tax, on distributions received from the
Michigan Series to the extent such distributions are attributable to interest on
tax-exempt obligations of the State of Michigan or any municipality, political
subdivision or governmental agency or instrumentality thereof or on obligations
issued by the Governments of Puerto Rico, the Virgin Islands and Guam, provided
that the Michigan Series complies with the requirement of the Internal Revenue
Code that at least 50% of the value of its assets at the close of each quarter
of its taxable year is invested in state, municipal or other obligations the
interest on which is exempt from federal income tax under Section 103(a) of the
Internal Revenue Code.
Other distributions from the Michigan Series, including those related to
long-term and short-term capital gains, will generally not be exempt from the
Michigan personal income tax or single business tax.
Income from the Michigan Series, to the extent attributable to interest on
obligations issued by Michigan or its political subdivisions, will be excluded
for purposes of determining yield under the Michigan intangibles tax.
The Fund has obtained rulings from the Michigan Department of Treasury which
confirm these state tax consequences for Michigan resident individuals and
corporations. Shareholders of the Michigan Series should consult their tax
advisers about other state and local tax consequences of their investments in
the Michigan Series.
MINNESOTA. In the opinion of Minnesota tax counsel, the portion of
exempt-interest dividends paid by the Minnesota Series that is excluded from
federal adjusted gross income and that is derived from interest income on
obligations of the State of Minnesota or its political or governmental
subdivisions, municipalities, governmental agencies or instrumentalities, or
Indian tribal governments of tribes located in Minnesota, is excluded from the
Minnesota taxable net income of individuals, estates and trusts, provided that
the portion of the exempt-interest dividends from such Minnesota sources paid to
all shareholders represents 95 percent or more of the exempt-interest dividends
paid by the Minnesota Series. The remaining portion of such dividends, and
dividends that are not exempt-interest dividends or capital gain dividends, are
included in the Minnesota taxable net income of individuals, estates and trusts,
except for dividends that are directly attributable to interest on obligations
of the United States Government, the Government of Puerto Rico, the Territory of
Guam or certain other territories and possessions of the United States.
Exempt-interest dividends are not excluded from the Minnesota taxable income of
corporations and financial institutions. Dividends qualifying for federal income
tax purposes as capital gain dividends are to be treated by shareholders of the
Minnesota Series as long-term capital gains under Minnesota law. However,
Minnesota has repealed the favorable treatment of long-term capital gains, while
retaining restrictions on the deductibility of capital losses.
Exempt-interest dividends attributable to interest on certain private
activity bonds issued after August 7, 1986 will be included in Minnesota
"alternative minimum taxable income" of individuals, estates and trusts for
purposes of computing Minnesota's alternative minimum tax. In certain limited
circumstances, the portion of Social Security benefits subject to Minnesota
income tax may be affected by the amount of exempt-interest
B-56
<PAGE>
dividends received by shareholders of the Minnesota Series. Exempt-interest
dividends may be subject to taxation under Minnesota law for an S Corporation
that has Subchapter C earnings and profits at the close of a taxable year if
more than 25 percent of its gross receipts is passive investment income.
Dividends generally will not qualify for the dividends-received deduction for
corporations and financial institutions. Losses (including those of
corporations) that are disallowed under federal law by reason of a shareholder's
receipt of exempt-interest dividends will be treated similarly under Minnesota
law, notwithstanding that all or a portion of such dividends is not excluded
from Minnesota taxable net income. Minnesota law restricts for individuals,
estates and trusts the deductibility of interest expense on indebtedness
incurred or continued to purchase or carry shares of the Minnesota Series, as
well as certain other expenses allocable to such shares, notwithstanding that
all or a portion of the exempt-interest dividends is not excluded from Minnesota
taxable net income.
Shareholders of the Minnesota Series should consult their tax advisers about
other state and local tax consequences of their investments in the Minnesota
Series.
NEW JERSEY. In the opinion of New Jersey tax counsel, individual
shareholders of the New Jersey Series and the New Jersey Money Market Series
resident in New Jersey and shareholders of the New Jersey Series and the New
Jersey Money Market Series that are trusts or estates will not be subject to New
Jersey income tax on distributions received from either series to the extent
that such distributions are attributable to interest on tax-exempt obligations
of the State of New Jersey or its political subdivisions and authorities, or
obligations issued by the Governments of Puerto Rico, the Virgin Islands and
Guam, provided that the relevant Series complies with the requirement of the New
Jersey Gross Income Tax Act that (1) 80% of the aggregate principal amount of
all its investments (excluding cash, cash items and receivables, and financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto that are related to such series' business of
investing in securities (Related Financial Instruments)) are invested in
obligations issued by the State of New Jersey or any of its agencies or
political subdivisions, or other obligations exempt from state or local taxation
under the laws of New Jersey and the United States and (2) it has no investments
other than interest bearing obligations, obligations issued at a discount, and
cash and cash items, including receivables, and Related Financial Instruments.
Distributions received by shareholders who are resident individuals, trusts
or estates from the New Jersey Series and the New Jersey Money Market Series
which are attributable to gains realized on the sale or exchange of bonds issued
by the State of New Jersey or its political subdivisions are exempt from New
Jersey income tax. Other distributions from the New Jersey Series and the New
Jersey Money Market Series, including those related to long-term and short-term
capital gains from other bonds, will generally not be exempt from New Jersey
income tax.
Shareholders of the New Jersey Series and the New Jersey Money Market Series
should consult their tax advisers about other state and local tax consequences
of their investments in these Series.
NEW YORK. The New York State franchise tax law and the New York City
general corporation tax law have special provisions governing the taxation of
regulated investment companies which elect to be treated and qualify as such
under Subchapter M of the Internal Revenue Code. Assuming that (1) the New York
Series and the New York Money Market Series (the Series) each are treated as a
separate entity for federal income and New York purposes, (2) each such Series
qualifies as a regulated investment company and distributes all of its
investment income and short-term and long-term capital gains so as to have no
federal income tax liability, and (3) all of the assets of each Series consist
of New York Obligations (as described below), other governmental obligations,
cash or certain cash equivalents, in the opinion of New York tax counsel, each
Series will be exempt from the New York State franchise tax and the New York
City general corporation tax, except for 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
B-57
<PAGE>
New York and its political subdivisions, and obligations of the Governments of
Puerto Rico, the Virgin Islands and Guam (New York Obligations), provided that
the relevant Series qualifies as a regulated investment company and satisfies
the requirements of the Internal Revenue Code necessary to pay exempt-interest
dividends, including the requirement that at least 50% of the value of its
assets at the close of each quarter of its taxable year be invested in state,
municipal or other obligations the interest on which is excluded from gross
income for federal income tax purposes under Section 103(a) of the Internal
Revenue Code. Individual shareholders who reside in New York City will be able
to exclude such distributions for City income tax purposes.
Other distributions from the New York Series, the New York Money Market
Series and the New York Income Series, including those related to long-term and
short-term capital gains, will generally not be exempt from State or City income
tax.
Distributions from these Series will not be excluded from net income and
shares of these Series will not be excluded from investment capital in
determining State or City franchise and corporation taxes for corporate
shareholders.
Shares of these Series will not be subject to any State or City property
tax.
The Fund has obtained the opinion of its New York tax counsel to confirm
these State and City tax consequences for the New York Series and the New York
Money Market Series and for New York resident individuals and corporations who
are shareholders of the New York Series and the New York Money Market Series.
The Fund anticipates receiving an opinion of its New York tax counsel to confirm
these State and City tax consequences for the New York Income Series and for New
York residents who are shareholders of that series when such series is offered.
Shareholders of the New York Series, the New York Money Market Series and the
New York Income Series should consult their advisers about other state and local
tax consequences of their investments in these Series.
NORTH CAROLINA. In the opinion of North Carolina tax counsel, individual
shareholders resident in North Carolina and shareholders that are trusts or
estates will not be subject to North Carolina income tax on distributions
received from the North Carolina Series to the extent such distributions are
either (i) exempt from federal income tax and attributable to interest on
obligations of North Carolina or its political subdivisions; nonprofit
educational institutions organized or chartered under the laws of North
Carolina; or Guam, Puerto Rico or the Virgin Islands including the governments
thereof and their agencies, instrumentalities and authorities or (ii)
attributable to interest on direct obligations of the United States. These North
Carolina income tax exemptions will be available only if the North Carolina
Series complies with the requirement of the Internal Revenue Code that at least
50% of the value of its assets at the close of each quarter of its taxable year
is invested in state, municipal or other obligations the interest on which is
exempt from federal income tax under Section 103(a) of the Internal Revenue
Code.
Other distributions from the North Carolina Series (except distributions of
capital gains attributable to the sale by the North Carolina Series of an
obligation the profit from which is exempt by a North Carolina statute) will
generally not be exempt from North Carolina income tax.
Shares of the North Carolina Series will not be subject to the North
Carolina intangibles tax provided that the Series satisfies certain substantive
and reporting requirements pertaining to the composition of its portfolio. The
Series intends to comply with all such requirements.
The Series has obtained rulings signed by the Directors of the Individual
Income Tax Division and the Intangibles Tax Division of the North Carolina
Department of Revenue and an Information Release issued by such Individual
Income Tax Division which form the basis of the opinion of North Carolina tax
counsel regarding the North Carolina income tax and intangibles tax consequences
of investments in the North Carolina Series for individuals, trusts and estates.
The general practice in North Carolina is for taxpayers to rely on rulings
signed by a Division Director and Information Releases issued by a Division.
Shareholders of the North Carolina Series should consult their tax advisers
about other state and local tax consequences of their investments in the North
Carolina Series.
B-58
<PAGE>
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 50%
requirement described above is 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 to the extent such distributions are attributable to interest from
tax-exempt obligations of the Commonwealth and its political subdivisions and
authorities, and further provided that such distributions are not included in
federal taxable income determined before net operating loss deductions and
special deductions.
The Pennsylvania Series will not be treated as a taxable entity and
therefore will not be subject to the Pennsylvania personal income tax or
corporate net income tax.
In addition, shares of the Pennsylvania Series will not be subject to
personal property taxation in Pennsylvania to the extent that the personal
property owned by the Pennsylvania Series would not be subject to such taxation
if owned by a resident of Pennsylvania. Because the Pennsylvania Series will
invest predominantly in obligations of the Commonwealth and its political
subdivisions and authorities, which obligations are not subject to personal
property taxation in Pennsylvania, only a small fraction, if any, of the value
of the shares of the Pennsylvania Series would be subject to such tax.
Shareholders of the Pennsylvania Series should consult their tax advisers
about other state and local tax consequences of their investments in the
Pennsylvania Series.
B-59
<PAGE>
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
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.
B-60
<PAGE>
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
B-61
<PAGE>
shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication and other costs. For the fiscal year ended August 31, 1994, the
Fund incurred fees for the services of PMFS in the following amounts with
respect to each series:
<TABLE>
<CAPTION>
TRANSFER AGENCY
SERIES FEES
- ---------------------------------------------------- ----------------
<S> <C>
Arizona............................................. $ 23,600
Connecticut Money Market............................ 29,000
Florida............................................. 44,600
Georgia............................................. 14,000
Maryland............................................ 27,200
Massachusetts....................................... 27,000
Massachusetts Money Market.......................... 23,200
Michigan............................................ 40,500
Minnesota........................................... 22,000
New Jersey.......................................... 116,700
New Jersey Money Market............................. 82,500
New York............................................ 138,000
New York Money Market............................... 131,000
North Carolina...................................... 28,900
Ohio................................................ 53,000
Pennsylvania........................................ 131,000
</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,
B-62
<PAGE>
superior liquidity support or demonstrated broad-based access to the market for
refinancing. Loans bearing the designation MIG 2 are of high quality with
margins of protection ample although not so large as in the preceding group.
Loans bearing the designation MIG 3 are of favorable quality, with all security
elements accounted for but lacking the strength of the preceding grades. Loans
bearing the designation MIG 4 are of adequate quality. Protection commonly
regarded and required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations having an original maturity not
exceeding one year.
Prime-1: Issuers rated at Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by 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.
B-63
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
ARIZONA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.6%
Arizona St. Edl. Loan
Mkt. Corp.,
A $ 1,375 7.00%, 3/1/05, Ser.
B.................... $ 1,453,334
Arizona St. Hsg. Fin.
Review Brd.,
Sngl. Fam. Mtge. Rev.,
A-* 10 10.625%, 12/1/02, Ser.
82................... 10,310
Arizona St. Mun. Fin.
Proj.,
Cert. of Part.,
8.75%, 8/1/06, Ser. 15,
Aaa 700 B.I.G.................. 749,014
7.875%, 8/1/14, Ser.
25,
Aaa 2,250 A.M.B.A.C.............. 2,724,412
Arizona St. Trans. Brd.
Hwy. Rev.,
Aaa 2,000(D)@ 7.00%, 7/1/09.......... 2,216,100
Aa 1,500(D) 6.00%, 7/1/10.......... 1,587,765
Arizona St. Univ. Sys.
Rev.,
Aaa 1,000(D) 7.00%, 7/1/10, Ser.
A.................... 1,121,880
Central Arizona Wtr.
Consv. Dist.,
Contract Rev.,
A1 1,500(D) 7.50%, 11/1/05......... 1,716,285
Chandler, Cap. Apprec.
Ref.,
Aaa 2,000 Zero Coupon, 7/1/02,
F.G.I.C.............. 1,318,500
Gen. Oblig.,
Aaa 500 4.375%, 7/1/13,
F.G.I.C.............. 399,390
La Paz Cnty., Unified
Sch. Dist.,
No. 27, Parker Impvt.
Proj.,
Baa 450 9.40%, 7/1/96.......... 483,728
Maricopa Cnty. Hosp.
Dist. No. 1, Facs.
Rev.,
East Valley
Behavioral
Hlth. Fac. Proj.,
Aaa 725(D) 7.80%, 6/1/13,
F.G.I.C.............. 796,804
Maricopa Cnty. Ind.
Dev. Auth.
Hosp. Fac. Rev.,
John C. Lincoln
Hosp.,
Aaa 2,000 7.00%, 12/1/00,
F.S.A................ 2,188,640
Maricopa Cnty. Ind.
Dev. Auth. Hosp. Fac.
Rev.,
Mercy Hlth.,
9.00%, 7/1/99, Ser. D,
Aaa $ 1,000 M.B.I.A.,.............. $ 1,058,760
A1 525(D) 9.25%, 7/1/11, Ser.
D.................... 556,616
A1 475 9.25%, 7/1/11, Ser.
D.................... 500,132
Samaritan Hlth. Svcs.,
Aaa 290(D) 12.00%, 1/1/08......... 341,527
Maricopa Cnty. Sch.
Dist.,
No. 41 Gilbert Proj.,
6.50%, 7/1/08, Ser. E,
Aaa 2,000(D)@ F.G.I.C................ 2,170,720
No. 40 Glendale Elem.
Sch.,
Zero Coupon, 7/1/04,
Aaa 2,810 A.M.B.A.C.............. 1,621,510
No. 11 Peoria Unified
Sch. Dist.,
Zero Coupon, 7/1/04,
Aaa 1,500 M.B.I.A................ 865,575
Zero Coupon, 7/1/04,
Aaa 1,140 F.G.I.C................ 657,837
No. 3 Tempe Elem. Sch.,
Zero Coupon, 7/1/09,
Aaa 1,500 A.M.B.A.C.............. 595,155
Zero Coupon, 7/1/14,
Aaa 1,500 A.M.B.A.C.............. 425,055
Maricopa Cnty. Unified
Sch. Dist.,
No. 80 Chandler,
F.G.I.C.
Aaa 1,330 Zero Coupon, 7/1/09.... 527,704
Aaa 1,000 6.25%, 7/1/11.......... 1,029,360
Navajo Cnty. Unified
Sch. Dist.,
No. 006 Herber
Overgaard,
Aaa 250 7.25%, 7/1/00,
A.M.B.A.C............ 276,285
Aaa 300 7.35%, 7/1/03,
A.M.B.A.C............ 332,679
Nogales Mun. Dev. Auth.
Rev.,
Aaa 500(D)@ 8.00%, 6/1/08,
M.B.I.A.............. 558,990
Peoria Bell Road Impvt.
Dist.,
BBB* 465 7.20%, 1/1/11.......... 486,525
Phoenix Arpt. Rev.,
6.40%, 7/1/12, Ser. D,
Aaa 810 M.B.I.A................ 817,930
</TABLE>
B-64 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
Phoenix Ind. Dev. Auth.
Hosp.,
John C. Lincoln Hosp.,
BBB* $ 500 6.00%, 12/1/10......... $ 467,470
BBB* 500 6.00%, 12/1/14......... 453,245
Phoenix St. & Hwy.
Rev.,
A1 1,480 6.25%, 7/1/06, Ser.
92................... 1,546,126
Zero Coupon, 7/1/12,
Aaa 3,000 F.G.I.C................ 975,420
Pima Cnty. Ind. Dev.
Auth. Hlth. Care,
Carondelet
St. Josephs & Marys
Hosp.,
Aaa 1,000 7.90%, 7/1/05,
B.I.G................ 1,115,350
Aaa 1,000(D) 8.00%, 7/1/13,
B.I.G................ 1,119,170
Pima Cnty. Ind. Dev.
Auth. Rev.,
Tucson Elec. Pwr.
Co.,
Aaa 2,700 7.25%, 7/15/10,
F.S.A................ 2,887,110
Pima Cnty., Unified
Sch. Dist.
No. 16, Catalina
Foothills,
Zero Coupon, 7/1/08,
Aaa 3,000 F.G.I.C................ 1,290,810
Zero Coupon, 7/1/09,
Aaa 3,455 F.G.I.C................ 1,370,840
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 835 7.50%, 4/1/22.......... 869,110
Puerto Rico Comnwlth.
Hwy.
Auth. Rev.,
AAA* 490(D) 7.70%, 7/1/03, Ser.
Q.................... 566,763
Puerto Rico, Comnwlth.,
Gen. Oblig.,
8.41%, 7/1/08, Ser. A,
Aaa 1,000(D)(D) M.B.I.A................ 1,012,500
Salt River Proj. Agric.
Impvt. & Pwr. Dist.,
Elec. Sys. Rev.,
Aa 1,500 4.75%, 1/1/17, Ser.
C.................... 1,218,540
Aa 500 5.75%, 1/1/20, Ser.
C.................... 468,960
Santa Cruz Cnty.
Unified Sch. Dist.
No. 1
Nogales, Cruz Cnty.,
Zero Coupon, 1/1/06,
Aaa 770 A.M.B.A.C.............. 397,051
Santa Cruz Cnty.,
Unified Sch. Dist.
No. 1
Nogales, Cruz Cnty.,
Zero Coupon, 7/1/06,
Aaa $ 700 A.M.B.A.C.............. $ 350,560
Scottsdale Ind. Dev.
Auth. Rev., Mem.
Hosp.,
8.50%, 9/1/07, Ser. A,
Aaa 2,100 A.M.B.A.C.............. 2,352,378
Scottsdale, Gen.
Oblig.,
Aa1 500 5.50%, 7/1/09.......... 479,885
Aa1 1,000(D) 6.00%, 7/1/10.......... 1,066,020
Aa1 1,000 4.00%, 7/1/13, Ser.
D.................... 737,640
Tempe Impvt. Dist. Auth. Rev.,
Papago Park Ctr.,
Dist. No. 166,
A1 500 7.10%, 1/1/06.......... 522,910
Tempe, Gen. Oblig.,
Aa 500 5.25%, 7/1/13.......... 451,190
Tolleson Mun. Fin. Corp. Rev.,
Citizen Util. Co.,
AAA* 400 9.20%, 9/1/05.......... 426,812
Tucson Wtr. Rev.,
Aaa 1,000 8.60%, 7/1/00,
E.T.M................ 1,179,540
A1 1,000 5.50%, 7/1/09.......... 947,480
7.00%, 7/1/10, Ser. C,
Aaa 500 M.B.I.A................ 534,925
Univ. Arizona Revs.
Sys.,
A1 1,750 6.25%, 6/1/11, Ser.
B.................... 1,771,438
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund,
NR 600 7.25%, 10/1/18, Ser.
A.................... 618,972
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Prog.,
NR 460 7.75%, 10/1/06, Ser.
91................... 502,978
Virgin Islands Wtr. &
Pwr. Auth., Elec.
Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser.
A.................... 522,300
Wtr. Sys. Rev.,
NR 500 8.50%, 1/1/10, Ser.
A.................... 549,280
------------
Total long-term
investments
(cost $55,132,298)..... 58,361,295
------------
</TABLE>
B-65 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS--1.4%
Goodyear, Gen. Oblig.,
Baa1 $ 100 10.00%, 7/1/95......... $ 104,311
Pinal Cnty. Ind. Dev.
Auth. Hlth. Care,
Ctrl. Rev., F.R.D.D.,
P1 700 3.35%, 9/1/94.......... 700,000
------------
Total short-term
investments
(cost $799,625)........ 804,311
------------
Total Investments--99.0%
(cost $55,931,923; Note
4)................... 59,165,606
Other assets in excess
of
liabilities--1.0%.... 613,223
------------
Net Assets--100%....... $ 59,778,829
------------
------------
</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 Company.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's rating.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D)Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
@ 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.
B-66 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $55,931,923)................................................. $59,165,606
Cash..................................................................................... 83,991
Interest receivable...................................................................... 737,249
Receivable for Fund shares sold.......................................................... 21,467
Other assets............................................................................. 1,869
---------------
Total assets........................................................................... 60,010,182
---------------
Liabilities
Accrued expenses......................................................................... 66,324
Payable for Fund shares reacquired....................................................... 57,677
Dividends payable........................................................................ 49,717
Management fee payable................................................................... 25,227
Distribution fee payable................................................................. 22,648
Due to broker-variation margin payable................................................... 8,750
Deferred trustee fees.................................................................... 1,010
---------------
Total liabilities...................................................................... 231,353
---------------
Net Assets............................................................................... $59,778,829
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 51,601
Paid-in capital in excess of par....................................................... 56,542,821
---------------
56,594,422
Distributions in excess of net realized gains.......................................... (25,526)
Net unrealized appreciation of investments............................................. 3,209,933
---------------
Net assets, August 31, 1994............................................................ $59,778,829
---------------
---------------
Class A:
Net asset value and redemption price per share ($7,674,526 / 662,409 shares of
beneficial interest issued and outstanding).......................................... $11.59
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $11.95
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share ($52,104,103 / 4,497,713
shares of beneficial interest issued and outstanding)................................ $11.58
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share ($199.97 / 17.262 shares
of beneficial interest issued and outstanding)....................................... $11.58
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-67
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1994
---------------
<S> <C>
Income
Interest............................ $ 3,939,686
---------------
Expenses
Management fee...................... 313,334
Distribution fee--Class A........... 7,141
Distribution fee--Class B........... 277,628
Custodian's fees and expenses....... 52,000
Reports to shareholders............. 37,500
Transfer agent's fees and
expenses............................ 33,000
Registration fees................... 20,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Trustees' fees...................... 3,375
Miscellaneous....................... 7,770
---------------
Total expenses.................... 777,248
---------------
Net investment income................. 3,162,438
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 790,344
Financial futures contract
transactions........................ (32,841)
---------------
757,503
---------------
Net change in unrealized
appreciation/depreciation of:
Investments......................... (4,562,693)
Financial futures contracts......... (22,813)
---------------
(4,585,506)
---------------
Net loss on investments............... (3,828,003)
---------------
Net Decrease in Net Assets
Resulting from Operations............. $ (665,565)
---------------
---------------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income... $ 3,162,438 $ 2,979,801
Net realized gain on
investment
transactions.......... 757,503 175,821
Net change in unrealized
appreciation of
investments........... (4,585,506) 3,112,559
------------ -----------
Net increase (decrease)
in net assets
resulting from
operations............ (665,565) 6,268,181
------------ -----------
Dividends and
distributions (Note 1):
Dividends from net
investment income
Class A............... (386,495) (201,649)
Class B............... (2,775,943) (2,778,152)
------------ -----------
(3,162,438) (2,979,801)
------------ -----------
Distributions from net
realized gains
Class A............... (74,328) (21,305)
Class B............... (618,468) (500,545)
------------ -----------
(692,796) (521,850)
------------ -----------
Series share transactions
(Note 5)
Net proceeds from shares
sold.................. 10,037,346 12,302,375
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 2,064,510 1,717,602
Cost of shares
reacquired.............. (11,709,424) (6,722,273)
------------ -----------
Net increase in net
assets from Series
share transactions.... 392,432 7,297,704
------------ -----------
Total increase
(decrease).............. (4,128,367) 10,064,234
Net Assets
Beginning of year......... 63,907,196 53,842,962
------------ -----------
End of year............... $ 59,778,829 $63,907,196
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements.
B-68
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Arizona Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-69
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $63,200 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $76,800 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$23,600 for the services of PMFS. As of August 31, 1994, approximately $1,900 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $20,412,123 and $21,899,033, 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, 1994, net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes is $3,233,683 (gross
unrealized appreciation--$4,247,842 gross unrealized depreciation--$1,014,159).
At August 31, 1994, the Series sold 35 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts is $3,606,406. The value of such contracts on August 31, 1994 was
$3,630,156, thereby resulting in an unrealized loss of $23,750.
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
B-70
<PAGE>
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 commencing in or about February
1995.
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- -------- ------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold..................... 156,225 $ 1,879,629
Shares issued in reinvestment of
dividends and distributions... 29,257 350,410
Shares reacquired............... (55,416) (665,858)
-------- ------------
Net increase in shares
outstanding................... 130,066 $ 1,564,181
-------- ------------
-------- ------------
Year ended August 31, 1993:
Shares sold..................... 379,867 $ 4,588,716
Shares issued in reinvestment of
dividends and distributions... 10,501 127,266
Shares reacquired............... (38,736) (459,132)
-------- ------------
Net increase in shares
outstanding................... 351,632 $ 4,256,850
-------- ------------
-------- ------------
<CAPTION>
Class B Shares Amount
- -------------------------------- -------- ------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold..................... 679,458 $ 8,157,517
Shares issued in reinvestment of
dividends and distributions... 142,601 1,714,100
Shares reacquired............... (930,146) (11,043,566)
-------- ------------
Net decrease in shares
outstanding................... (108,087) $ (1,171,949)
-------- ------------
-------- ------------
Year ended August 31, 1993:
Shares sold..................... 639,982 $ 7,713,659
Shares issued in reinvestment of
dividends and distributions... 132,586 1,590,336
Shares reacquired............... (520,539) (6,263,141)
-------- ------------
Net increase in shares
outstanding................... 252,029 $ 3,040,854
-------- ------------
-------- ------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
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-71
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
ARIZONA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
----------------------------------------------------- ------------------------------------------------ -----------
January 22, August 1,
1990(D) 1994(D)(D)
Year Ended August 31, through Year Ended August 31, through
--------------------------------------- August 31, ------------------------------------------------ August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
<CAPTION>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning
of period... $12.44 $11.88 $11.32 $10.80 $ 10.99@ $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 10.97 $ 11.60
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Income from
investment
operations
Net
investment
income... .65 .67 .68 .69 .42 .60 .62 .63 .64 .65 .04
Net realized
and unrealized
gain (loss)
on investment
transactions.. (.72) .68 .56 .52 (.19)@ (.73) .69 .55 .52 (.17) (.02)
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Total
from
investment
operations... (.07) 1.35 1.24 1.21 .23@ (.13) 1.31 1.18 1.16 .48 .02
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Less distributions
Dividends
from
net
investment
income... (.65) (.67) (.68) (.69) (.42) (.60) (.62) (.63) (.64) (.65) (.04)
Distributions
from net
realized
gains... (.13) (.12) -- -- -- (.13) (.12) -- -- -- --
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Total
distributions.(.78) (.79) (.68) (.69) (.42) (.73) (.74) (.63) (.64) (.65) (.04)
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
Net asset
value,
end of
period... $11.59 $12.44 $11.88 $11.32 $ 10.80 $ 11.58 $ 12.44 $ 11.87 $ 11.32 $ 10.80 $ 11.58
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
------ ------ ------ ------ ----------- -------- ------- ------- ------- ------- -----------
TOTAL
RETURN#:... (.59)% 11.79% 11.23% 11.45% 2.01%@ (1.08)% 11.42% 10.68% 11.02% 4.49% 0.10%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)... $7,675 $6,622 $2,146 $1,508 $ 436 $52,104 $57,286 $51,697 $57,209 $59,216 $ 200@@
Average
net
assets
(000)... $7,141 $3,613 $1,758 $ 937 $ 260 $55,526 $53,656 $53,477 $58,973 $60,359 $ 199@@
Ratios to
average net
assets:##
Expenses,
including
distribution
fees... .89% .92% 1.02% 1.02% .96%* 1.29% 1.32% 1.42% 1.41% 1.30% 1.90%*
Expenses,
excluding
distribution
fees... .79% .82% .92% .92% .86%* .79 % .82% .92% .91% .82% 1.14%*
Net
investment
income... 5.40% 5.58% 5.81% 6.13% 6.36%* 5.40 % 5.18% 5.42% 5.77% 5.99% 6.34%*
Portfolio
turnover... 33% 14% 42% 25% 49% 33 % 14% 42% 25% 49% 33%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
## Because of the event referred to in (D)(D) and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that of
Class A or B shares and are not necessarily indicative of future ratios.
@ Restated.
@@ Figures are actual and not rounded to the nearest thousand.
See Notes to Financial Statements.
B-72
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Arizona Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Arizona Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 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, Arizona Series, as of August 31, 1994, 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 17, 1994
B-73
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
CONNECTICUT MONEY MARKET SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--98.1%
Connecticut St. Arpt.
Rev.,
Bradley Int'l. Airport
7.05%, 10/1/94, Ser. 92,
Aaa $ 2,375 F.G.I.C................. $ 2,384,081
Connecticut St. Dev.
Auth., Conco Proj.
3.00%, 9/1/94, Ser. 85,
P1 1,700 F.R.W.D................. 1,700,000
Ctrl. Rev., Lt. & Pwr.
Co. Proj.,
3.15%, 9/7/94, Ser. 93B,
VMIG1 5,700 F.R.W.D................. 5,700,000
Jewish Cmnty. Ctr.
of New Haven,
2.70%, 9/7/94, Ser. 92,
A-1* 725 F.R.M.D................. 725,000
RK Bradley Assoc. Proj.,
2.85%, 9/7/94, Ser. 85,
A-2* 1,500 F.R.W.D................. 1,500,000
Rand Whitney Container
Bd.,
2.95%, 9/7/94, Ser. 93,
P1 1,000 F.R.W.D................. 1,000,000
SHW Inc. Proj.,
3.30%, 9/7/94, Ser. 90,
NR 3,100 F.R.W.D................. 3,100,000
Connecticut St., Gen.
Oblig.,
Aa 1,000 5.20%, 5/1/95, Ser.
94.................... 1,012,926
Recreation Notes,
3.05%, 9/7/94, Ser. 91B,
VMIG1 1,100 F.R.W.D................. 1,100,000
Aa 1,000 5.25%, 12/15/94, Ser.
91A................... 1,008,361
Connecticut St., Hlth. &
Edl. Facs. Auth. Rev.,
Charlotte-Hungerford,
3.00%, 9/1/94, Ser. B,
VMIG1 900 F.R.W.D................. 900,000
Yale Univ., T.E.C.P.,
VMIG1 $ 1,400 2.85%, 9/8/94, Ser. L... $ 1,400,000
VMIG1 1,500 2.85%, 9/8/94, Ser. N... 1,500,000
Connecticut St. Hsg.
Fin. Auth., Mtg. Fin.
Prog. A.N.N.M.T.,
VMIG1 2,000 2.90%, 11/15/94, Ser.
93H-2................. 2,000,000
Taxable Hsg. Mtg.
Fin.Sub.
3.65%, 5/15/95,
Ser. 92D-2............ 1,000,000
VMIG1 1,000
Connecticut St Res. Rec.
Auth.,
Aaa 500 8.25%, 11/15/94, Ser.
A..................... 504,856
Connecticut St. Spec.
Assmt., Unemployment
Comp.,
3.05%, 9/7/94, Ser. 93B,
VMIG1 1,000 F.R.W.D................. 1,000,000
MIG1 1,750 3.10%, 11/15/94, Ser.
93A................... 1,752,182
Connecticut St. Spec.
Tax Oblig., Trans.
Infrastructure Rev.,
3.20%, 9/7/94, Ser. 90I,
VMIG1 4,100 F.R.W.D................. 4,100,000
East Lyme Ct., Gen.
Oblig.,
4.25%, 8/3/95, Ser. 94,
NR 2,800 B.A.N................... 2,804,951
Fairfield Ct., Gen.
Oblig., Swr. Assmt.
Note
NR 1,750 3.60%, 6/9/95........... 1,751,287
Norwich Ct.,
3.40%, 9/30/94, Ser. 94,
NR 2,650 B.A.N................... 2,650,826
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
2.90%, 9/7/94, Ser. 85,
VMIG1 2,700 F.R.W.D.,............... 2,700,000
Puerto Rico Hsg. Fin.
Corp. Rev. Med.,
2.60%, 9/15/94, Ser.
90I,
Aa 2,165 M.T.H.O.T............... 2,165,000
</TABLE>
B-74 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Puerto Rico Ind. Med. &
Environ. Facs.,
Ana G. Mendez
Ed. Fndtn.,
2.90%, 9/7/94, Ser. 85,
A-1* $ 200 F.R.W.D................. $ 200,000
Reynolds Metal Co.
Proj., A.N.N.O.T.,
P1 1,900 4.00%, 9/1/95, Ser. 83
A..................... 1,900,000
Schering-Plough Corp.,
2.80%, 12/1/94, Ser.
83A,
AAA* 700 A.N.N.O.T............... 700,000
Puerto Rico Maritime
Shipping Auth.,
P1 2,000 2.65%, 9/6/94,
T.E.C.P............... 2,000,000
Stamford Ct.,
MIG1 3,000 3.07%, 3/22/95,
B.A.N................. 3,000,632
-----------
Total Investments--98.1%
(amortized
cost--$53,260,102**)... 53,260,102
Other assets in excess
of
liabilities--1.9%..... 1,042,071
-----------
Net Assets--100%........ $54,302,173
-----------
-----------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
M.T.H.O.T.--Monthly Optional Tender.
T.E.C.P.--Tax Exempt Commercial Paper.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par, or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax
purposes is substantially the same as for financial
reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
B-75 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1994
-----------
<S> <C>
Investments, at amortized cost which approximates market value............................. $53,260,102
Cash....................................................................................... 840,182
Receivable for Fund shares sold............................................................ 532,409
Interest receivable........................................................................ 405,991
Receivable for investments sold............................................................ 75,242
Deferred expenses and other assets......................................................... 29,895
-----------
Total assets............................................................................. 55,143,821
-----------
Liabilities
Payable for Fund shares reacquired......................................................... 766,555
Accrued expenses and other liabilities..................................................... 38,118
Dividends payable.......................................................................... 20,600
Distribution fee payable................................................................... 9,510
Due to Manager............................................................................. 5,855
Deferred Trustees' fees.................................................................... 1,010
-----------
Total liabilities........................................................................ 841,648
-----------
Net Assets................................................................................. $54,302,173
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value......................................... $ 543,022
Paid-in capital in excess of par......................................................... 53,759,151
-----------
Net assets, August 31, 1994.............................................................. $54,302,173
-----------
-----------
Net asset value, offering price and redemption price per share ($54,302,173 / 54,302,173
shares of beneficial interest issued and outstanding; unlimited number of shares
authorized)............................................................................ $1.00
-----
-----
</TABLE>
See Notes to Financial Statements.
B-76
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
----------
<S> <C>
Income
Interest........................... $1,536,609
----------
Expenses
Management fee, net of waiver of
$243,395......................... 63,440
Distribution fee................... 75,743
Custodian's fees and expenses...... 60,000
Transfer agent's fees and
expenses......................... 35,000
Reports to shareholders............ 28,400
Legal fees......................... 20,000
Registration fees.................. 13,000
Amortization of organization
expense.......................... 11,750
Audit fee.......................... 10,000
Trustees' fees..................... 3,375
Miscellaneous...................... 7,612
----------
Total expenses................... 328,320
----------
Net investment income................ 1,208,289
----------
Realized Loss on Investments
Net realized loss on investment
transactions....................... (4,743)
----------
Net Increase in Net Assets
Resulting from Operations............ $1,203,546
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ------------------------------
in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income............... $ 1,208,289 $ 1,150,867
Net realized gain
(loss) on investment
transactions......... (4,743) 371
------------- -------------
Net increase in net
assets resulting from
operations........... 1,203,546 1,151,238
------------- -------------
Dividends and
distributions to
shareholders........... (1,203,546) (1,151,238)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from
shares
subscribed........... 210,712,023 197,325,014
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions........ 1,156,043 1,096,823
Cost of shares
reacquired........... (215,359,425) (181,107,990)
------------- -------------
Net increase (decrease)
in net assets from
Series share
transactions......... (3,491,359) 17,313,847
------------- -------------
Total increase
(decrease)............. (3,491,359) 17,313,847
Net Assets
Beginning of year........ 57,793,532 40,479,685
------------- -------------
End of year.............. $ 54,302,173 $ 57,793,532
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-77
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series'
gross income consists of tax-exempt interest, no federal income tax provision
is required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $52,600 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Note 2. Agreements The Fund has a 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. PMF
waived its entire management fee until October 31, 1993. Effective November 1,
1993, PMF reduced the management fee waiver to 75%. The amount of fees waived
for the fiscal year ended August 31, 1994 amounted to $243,395 ($.004 per share;
.40% 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-78
<PAGE>
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$29,000 for the services of PMFS. As of August 31, 1994, approximately $2,700 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-79
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
August 5,
1991*
Year ended August 31, through
------------------------------------ August 31,
1994 1993 1992 1991
<S> <C> <C> <C> <C>
------------ ------- ------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains(D)........................ .020 .022 .034 .003
Dividends and distributions to shareholders........................ (.020) (.022) (.034) (.003)
------------ ------- ------- ----------
Net asset value, end of period..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------- ------- ----------
------------ ------- ------- ----------
TOTAL RETURN#:..................................................... 2.02% 2.20% 3.42% .30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 54,302 $57,794 $40,480 $ 10,904
Average net assets (000)........................................... $ 60,594 $53,152 $33,964 $ 6,730
Ratios to average net assets(D):
Expenses, including distribution fee............................. .542% .387% .125% .125%**
Expenses, excluding distribution fee............................. .417% .262% .00% .00%**
Net investment income............................................ 1.99% 2.17% 3.20% 4.42%**
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of management fee waiver and/or expense subsidy.
# Total returns for periods of less than a full year are not annualized.
See Notes to Financial Statements.
B-80
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Connecticut Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Connecticut Money Market Series, including the
portfolio of investments, as of August 31, 1994, 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
three 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, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Connecticut Money Market Series, as of August 31, 1994, 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 17, 1994
B-81
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
FLORIDA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.8%
Alachua Cnty. Hlth. Facs. Auth.
Rev., Santa Fe Healthcare
Facs. Proj.,
Baa $ 1,750 7.60%, 11/15/13...... $ 1,815,520
Alachua Cnty. Ind. Dev. Rev.,
HB Fuller Co. Proj.,
NR 3,000 7.75%, 11/1/16....... 3,152,910
Brevard Cnty. Edl. Facs. Auth.,
Florida Inst. of Techn.,
BBB+* 1,500 6.875%, 11/1/22...... 1,533,345
Wuesthoff Mem. Hosp.,
6.625%, 4/1/13, Ser.
Aaa 1,000 A, M.B.I.A......... 1,041,280
Broward Cnty. Edl. Facs. Auth.
Rev., Nova Univ. Dorm. Proj.,
7.50%, 4/1/17, Ser.
BBB* 1,500(D) A.................. 1,717,890
Broward Cnty. Res. Rec. Rev.,
Ltd. Partnership So. Proj.,
A 2,730 7.95%, 12/1/08....... 2,993,882
Broward Cnty., Wtr. & Swr. Rev.,
5.125%, 10/1/15,
Aaa 1,750 A.M.B.A.C.......... 1,530,200
Citrus Cnty. Poll.
Ctrl. Rev.,
Pwr. Crystal Proj.,
6.35%, 2/1/22, Ser.
Aaa 2,300 B, M.B.I.A......... 2,325,093
City of Atlantis,
Wtr. & Swr. Rev.,
BBB* 1,750 6.50%, 9/1/22........ 1,732,167
City of Cocoa,
Wtr. & Swr. Rev.,
5.125%, 10/1/13,
Ser. B,
Aaa 1,000 A.M.B.A.C.......... 888,300
City of Deerfield
Beach,
Wtr. & Swr. Rev.,
6.125%, 10/1/06,
Aaa 550 F.G.I.C............ 575,559
Clay Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge.,
7.45%, 9/1/23, Ser.
Aaa $ 375 A, G.N.M.A......... $ 386,396
Clay Cnty. Utils.
Sys. Rev.,
5.00%, 11/1/23,
Aaa 3,500 F.G.I.C............ 2,915,955
Coral Springs Impvt.
Dist., Wtr. & Swr.
Rev.,
6.00%, 6/1/10,
Aaa 1,000 M.B.I.A............ 1,012,610
Dade Cnty. Hlth.
Facs. Auth.
Rev., Baptist Hosp.
of
Miami Proj.,
6.75%, 5/1/08, Ser.
Aaa 500 A, M.B.I.A......... 544,345
No. Shore Med. Ctr. Proj.,
Aaa 750 6.50%, 8/15/15, A.M.B.A.C.775,493
Dade Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge. G.N.M.A.,
7.75%, 9/1/22, Ser.
Aaa 980 C.................. 1,024,443
7.25%, 9/1/23, Ser.
Aaa 360(D)(D) B.................. 367,999
Dade Cnty. Pub. Facs. Rev.,
Jackson Mem. Hosp. M.B.I.A.,
4.875%, 6/1/15, Ser.
Aaa 2,000 A.................. 1,676,380
Aaa 2,000 5.25%, 6/1/23........ 1,731,940
Dade Cnty. Pub. Impvt. Rev.,
J & K Seaport,
6.50%, 10/1/26,
Aaa 5,500 A.M.B.A.C. 5,666,705
Dade Cnty. Sch. Brd. Ctfs. of
Part.,
6.00%, 5/1/14, Ser.
Aaa 2,725 A, M.B.I.A......... 2,686,087
Dade Cnty. Sch. Dist., M.B.I.A.,
Aaa 1,235 5.00%, 8/1/11........ 1,093,988
Aaa 1,500 5.00%, 8/1/13........ 1,314,675
5.00%, 8/1/14, Ser.
Aaa 2,000 1994............... 1,727,520
Dade Cnty. Wtr. & Swr. Sys. Rev.,
5.00%, 10/1/13,
Aaa 4,500 F.G.I.C............ 3,927,645
</TABLE>
B-82 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Duval Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge.,
8.375%, 12/1/14,
AAA* $ 685 G.N.M.A............ $ 704,139
Enterprise Cmnty. Dev. Dist.,
Osceola Co., Spl. Assmnt.,
6.00%, 5/1/10,
Aaa 2,320 M.B.I.A............ 2,330,626
Escambia Cnty. Hlth. Facs. Auth.
Rev., Baptist Hosp. Inc.,
8.70%, 10/1/14, Ser.
BBB+* 1,830 A.................. 2,033,789
Escambia Cnty. Hsg. Fin. Auth.
Rev., Sngl. Fam. Mtge.,
7.40%, 10/1/23, Ser.
Aaa 845(D)(D) A, G.N.M.A......... 878,040
Escambia Cnty. Poll. Ctrl., Rev.,
Champion Int'l. Corp. Proj.,
Baa1 1,500 6.90%, 8/1/22........ 1,499,850
Florida St. Brd. of
Ed.
Cap. Outlay, Pub.
Ed.,
Aa 1,400 5.125%, 6/1/18....... 1,207,808
7.25%, 6/1/23, Ser.
Aaa 255(D) A.................. 287,586
7.25%, 6/1/23, Ser.
Aa 245 A.................. 269,828
Florida St. Broward Cnty.,
Expwy. Auth.,
Aa 2,100@ 9.875%, 7/1/09....... 2,873,808
Florida St. Dept. of
Trans.,
7.20%, 7/1/11, Ser.
Aaa 1,000(D)/(D)(D) A, A.M.B.A.C..... 1,134,580
Florida St. Div. Bond Fin. Dept.,
Gen. Svcs. Rev.,
6.75%, 7/1/13,
Aaa 1,500 A.M.B.A.C.......... 1,583,445
Gen. Svcs. Rev., Dept. of
Natural Res. Preservation,
6.25%, 7/1/09, Ser.
Aaa 1,650 A, M.B.I.A......... 1,689,122
Florida St. Gen.
Oblig., Ref. Dade
Cnty. Rd.,
Aa 1,500 5.125%, 7/1/13....... 1,345,155
Florida St. Mun. Pwr. Agcy. Rev.,
4.50%, 10/1/27,
Aaa $ 4,365 A.M.B.A.C. $3,263,405
Gainesville Gtd. Entitlement Rev.,
5.50%, 8/1/10,
Aaa 2,635 A.M.B.A.C.......... 2,524,383
Hillsborough Cnty.
Ind. Dev.
Rev., Univ. Cmnty.
Hosp. Proj.,
5.75%, 8/15/10,
Aaa 1,000 M.B.I.A............ 980,540
Hillsborough Cnty.
Solid
Waste & Res. Rec.,
5.70%, 10/1/08,
Aaa 2,000 M.B.I.A............ 1,973,240
Jacksonville Cap. Impvt. Rev.,
Gator Bowl Proj.,
6.00%, 10/1/25,
Aaa 1,625 A.M.B.A.C. 1,593,491
Jacksonville Elec. Auth. Rev.,
Bulk Pwr. Supply Scherer,
Aaa 1,000(D)/(D)(D) 6.75%, 10/1/21... 1,104,090
Elec. Sys. 3-B,
Aa1 1,000 5.20%, 10/1/13....... 895,110
St. Johns Rvr. Pwr.
Park,
Zero Coupon,
Aa1 3,000 10/1/10............ 1,153,860
St. Johns Rvr.,
5.40%, 10/1/10, Ser.
Aa1 1,000 8.................. 934,660
Jacksonville Excise Tax Rev.,
6.25%, 10/1/05,
Aaa 1,000 A.M.B.A.C. 1,058,970
Jacksonville Hlth. Facs. Auth.
Hosp. Rev.,
Baptist Med. Ctr. Proj.,
7.30%, 6/1/19, Ser.
Aaa 450 A, M.B.I.A......... 492,133
Daughters Of Charity,
5.00%, 11/15/15, Ser.
Aa 1,000 A.................. 841,210
Nat'l. Ben. Assoc.,
Baa1 1,825 7.00%, 12/1/22....... 1,840,622
St. Lukes Hosp. Assoc. Proj.,
AA+* 1,000 7.125%, 11/15/20..... 1,062,570
</TABLE>
B-83 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Jacksonville Wtr. & Swr. Dev.
Rev., Suburban Utils.,
A2 $ 1,000 6.75%, 6/1/22........ $ 1,063,730
Kissimmee Util. Auth.
Elec.
Sys. Rev.,
F.G.I.C.,
Aaa 2,500 5.375%, 10/1/12...... 2,315,850
5.30%, 10/1/17, Ser.
Aaa 2,000 A.................. 1,780,480
Lake Cnty. Res. Rec.
Ind. Dev. Rev.,
5.95%, 10/1/13, Ser.
Baa 1,035 A.................. 943,703
Lee Cnty. Trans. Facs. Rev.,
6.75%, 10/1/11,
Aaa 1,000 A.M.B.A.C. 1,057,590
Leon Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge.,
7.30%, 4/1/21, Ser.
Aaa 485 A, G.N.M.A......... 499,574
Martin Cnty.,
4.50%, 2/1/09,
Aaa 1,575 A.M.B.A.C.......... 1,339,569
Miami Hlth. Facs. Auth. Hosp.
Rev., Mercy Hosp.,
A 1,000 8.125%, 8/1/11....... 1,097,440
North Port Util.
Rev.,
6.25%, 10/1/17,
Aaa 2,500 F.G.I.C............ 2,522,150
Okaloosa Cnty. Cap. Impvt. Rev.,
Zero Coupon, 12/1/06,
Aaa 450 M.B.I.A............ 229,298
Orange Cnty. Hsg.
Fin. Auth.,
Mtge. Rev.,
7.375%, 9/1/24, Ser.
AAA* 420 A, G.N.M.A......... 431,382
MultiFam. Ashley Point Apts.,
BBB+* 1,200 6.85%, 10/1/16....... 1,175,856
BBB+* 855 7.10%, 10/1/24....... 852,281
Orlando & Orange Cnty. Expwy.
Auth. Rev.,
Aaa 1,000(D)/(D)(D) 7.125%, 7/1/06... 1,066,230
5.25%, 7/1/14,
Aaa 1,000 A.M.B.A.C.......... 895,460
Aaa 1,000(D)/(D)(D) 7.25%, 7/1/14.... 1,069,320
Orlando Utils. Comn.,
Wtr. & Elec. Rev.,
Aa1 $ 1,500 5.125%, 10/1/19...... $ 1,284,195
Aa1 2,515 5.00%, 10/1/23....... 2,072,662
Palm Beach Cnty. Arpt. Sys. Rev.,
7.75%, 10/1/10,
Aaa 1,000 M.B.I.A............ 1,138,370
Polk Cnty. Sch. Brd.,
Ctfs. of Part.,
4.875%, 1/1/18,
Aaa 1,000 F.S.A.............. 824,790
Puerto Rico Gen.
Oblig.,
8.393%, 7/1/20,
Aaa 3,000** F.S.A.............. 2,812,500
Puerto Rico Elec. Pwr. Auth. Rev.,
Baa1 1,000 6.20%, 7/1/04........ 1,061,000
Puerto Rico Hsg. Fin. Corp. Rev.,
Sngl. Fam. Mtge. Rev.,
Baa 2,000 5.125%, 12/1/05...... 1,875,240
Baa 1,000 5.25%, 12/1/06....... 934,660
Puerto Rico Hwy. Auth. Rev.,
Baa1 2,000 5.00%, 7/1/02........ 1,955,520
Baa1 2,000 5.50%, 7/1/19........ 1,795,620
5.25%, 7/1/20, Ser
Baa 1,250 W.................. 1,077,812
7.75%, 7/1/16, Ser.
Baa1 500(D) Q.................. 579,585
Puerto Rico Pub. Bldgs. Auth.,
Pub. Ed. & Hlth. Facs.,
7.875%, 7/1/16, Ser.
Aaa 1,000(D)/** H.................. 1,106,940
Puerto Rico Tel. Auth. Rev.,
7.381%, 1/16/15, Ser. I,
Aaa 2,250 M.B.I.A............ 1,954,687
Reedy Creek Impvt. Dist. Utils.
Rev., M.B.I.A.,
5.00%, 10/1/19, Ser.
Aaa 2,500 1.................. 2,109,400
Sanford Wtr. & Swr. Rev.,
4.50%, 10/1/21,
Aaa 3,955 A.M.B.A.C. 3,035,383
</TABLE>
B-84 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
St. Petersburg Hlth. Facs. Auth.
Rev., Allegheny Hlth. Prog.,
7.00%, 12/1/15,
Aaa $ 1,000 M.B.I.A............ $ 1,080,200
Tampa Allegheny Hlth.
Sys.
Rev., St. Joseph
Hosp.,
6.70%, 12/1/07,
Aaa 2,535 M.B.I.A............ 2,736,127
Tampa Gtd. Entitlement Rev.,
7.05%, 10/1/07,
Aaa 2,000 A.M.B.A.C. 2,191,480
Venice Cap. Impvt.
Rev.,
Venice Hosp. Proj.,
A 2,000 5.75%, 12/1/24....... 1,764,140
Vero Beach Wtr. & Swr. Rev.,
5.00%, 12/1/21,
Aaa 2,245 F.G.I.C............ 1,879,671
Virgin Islands Pub. Fin. Auth.
Rev.,
Hwy. Trans. Trust Fund,
BBB* 260 7.65%, 10/1/99....... 273,546
Ref. Matching Loan
Notes,
7.25%, 10/1/18, Ser.
NR 900 A.................. 928,458
Virgin Islands
Territory, Hugo
Ins. Claims Fund
Proj.,
7.75%, 10/1/06, Ser.
NR 1,405 91................. 1,536,269
Volusia Cnty. Edl.
Fac.
Auth. Rev.,
AAA* 1,000 6.625%, 10/15/22..... 1,029,980
Volusia Cnty. Hlth.
Facs. Auth. Rev.,
BBB+* 2,000(D) 8.25%, 6/1/20........ 2,349,020
------------
Total long-term
investments
(cost
$144,835,817)...... 143,441,555
------------
SHORT-TERM INVESTMENTS--0.6%
Palm Beach Cnty. Wtr. & Swr. Rev.,
3.25%, 9/1/94,
VMIG1 $ 700 F.R.D.D............ $ 700,000
Pinellas Cnty. Hlth. Facs. Auth.
Rev.,
Pooled Hosp. Loan Prog.,
3.25%, 9/1/94,
VMIG1 200 F.R.D.D............ 200,000
------------
Total short-term
investments
(cost $900,000).... 900,000
------------
Total Investments--98.4%
(cost $145,735,817; Note
5) 144,341,555
Other assets in
excess of
liabilities--1.6%... 2,273,823
------------
Net Assets--100%..... $146,615,378
------------
------------
</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.#
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage
Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par or the
next date on which the rate of interest is
adjusted.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Indicates a when-issued security.
@ Pledged as initial margin on financial futures
contracts.
* Standard & Poor's rating.
** Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate. The
rate shown is the rate at period end.
N.R.--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-85 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $145,735,817)............................................... $ 144,341,555
Cash.................................................................................... 29,767
Interest receivable..................................................................... 2,556,815
Receivable for investments sold......................................................... 2,028,494
Receivable for Fund shares sold......................................................... 485,625
Due from Manager........................................................................ 78,650
Prepaid expenses and other assets....................................................... 12,863
---------------
Total assets.......................................................................... 149,533,769
---------------
Liabilities
Payable for investments purchased....................................................... 1,486,125
Payable for Fund shares reacquired...................................................... 1,225,143
Dividends payable....................................................................... 137,968
Accrued expenses and other liabilities.................................................. 28,373
Due to broker-variation margin payable.................................................. 21,094
Due to Distributors..................................................................... 18,678
Deferred trustees' fees................................................................. 1,010
---------------
Total liabilities..................................................................... 2,918,391
---------------
Net Assets.............................................................................. $ 146,615,378
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 147,916
Paid-in capital in excess of par...................................................... 148,439,262
---------------
148,587,178
Accumulated net realized loss on investments.......................................... (663,319)
Net unrealized depreciation on investments............................................ (1,308,481)
---------------
Net assets, August 31, 1994........................................................... $ 146,615,378
---------------
---------------
Class A:
Net asset value and redemption price per share ($134,848,886 / 13,604,715 shares of
beneficial interest issued and outstanding)......................................... $ 9.91
Maximum sales charge (3.0% of offering price)......................................... 0.31
---------------
Maximum offering price to public...................................................... $10.22
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share ($581,525 / 58,698
shares of
beneficial interest issued and outstanding)......................................... $ 9.91
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share ($11,184,967 /
1,128,212 shares of
beneficial interest issued and outstanding)......................................... $ 9.91
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-86
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest........................... $ 9,161,364
------------
Expenses
Management fee, net waiver of
$467,337........................... 311,558
Distribution fee--Class A, net
waiver of $134,896............... 11,593
Distribution fee--Class B.......... 47
Distribution fee--Class C.......... 69,602
Custodian's fees and expenses...... 85,000
Transfer agent's fees and
expenses........................... 53,000
Reports to shareholders............ 49,500
Registration fees.................. 30,000
Legal fees......................... 20,000
Audit fee.......................... 10,500
Amortization of deferred
organization expense............. 7,273
Trustees' fees..................... 3,375
Miscellaneous...................... 11,459
------------
Total expenses................... 662,907
Less: expense subsidy (Note 4)....... (270,113)
------------
Net expenses..................... 392,794
------------
Net investment income................ 8,768,570
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ (694,251)
Financial futures contract
transactions....................... 685,575
------------
(8,676)
------------
Net change in unrealized
appreciation/depreciation on:
Investments........................ (12,025,930)
Financial futures contracts........ 155,094
------------
(11,870,836)
------------
Net loss on investments.............. (11,879,512)
------------
Net Decrease in Net Assets Resulting
from Operations...................... $ (3,110,942)
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) -----------------------------
in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income................. $ 8,768,570 $ 7,354,295
Net realized gain
(loss) on investment
transactions......... (8,676) 2,571,909
Net change in
unrealized
appreciation/depreciation
of investments....... (11,870,836) 6,419,976
------------- -------------
Net increase (decrease)
in net assets
resulting from
operations........... (3,110,942) 16,346,180
------------- -------------
Dividends and distributions (Note 1):
Dividends to
shareholders from
investment income
Class A................ (8,305,093) (7,348,931)
Class B................ (582) --
Class C................ (462,895) (5,364)
------------- -------------
(8,768,570) (7,354,295)
------------- -------------
Distributions to
shareholders from net
realized gains
Class A................ (2,821,851) (1,396,748)
Class B................ -- --
Class C................ (142,331) --
------------- -------------
(2,964,182) (1,396,748)
------------- -------------
Series share transactions (Note 6)
Net proceeds from
shares sold.......... 35,379,732 52,329,243
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 5,323,495 3,739,870
Cost of shares
reacquired............. (31,275,509) (15,967,441)
------------- -------------
Net increase in net
assets from Series
share transactions... 9,427,718 40,101,672
------------- -------------
Total increase
(decrease)............. (5,415,976) 47,696,809
Net Assets
Beginning of year........ 152,031,354 104,334,545
------------- -------------
End of year.............. $ 146,615,378 $ 152,031,354
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-87
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason and because substantially all of the Series' gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-88
<PAGE>
Deferred Organization Expenses: The Series incurred approximately $32,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending December, 1995.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the year ended August 31, 1994, PMF waived 60% of its management fee, which
amounted to $467,337 ($.03 per share for Class A and C shares; .30% 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
distribution plan under which the distribution plan became a compensation plan,
effective August 1, 1994. Prior thereto, the distribution plan was a
reimbursement plan, under which PMFD was reimbursed for expenses actually
incurred by them up to the amount permitted under the Class A Plan. The Fund is
not obligated to pay any prior or future excess distribution costs (costs
incurred by the Distributor in excess of distribution fees paid by the Fund).
The rate of the distribution fees charged to Class A shares of the Fund did not
change under the amended plan of distribution.
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, 1993 through July 31, 1994. Effective August
1, 1994, PMFD eliminated its waiver. The amount of distribution fees waived by
PMFD was $134,896 ($.01 per share for Class A shares; .10% of average net
assets) for the fiscal year ended August 31, 1994. Expenses under the Class B
and C Plans were .50 of 1% and .75 of 1% of the average daily net assets,
respectively, for the fiscal year ended August 31, 1994.
PMFD has advised the Series that it has received approximately $880,300 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$44,600 for the services of PMFS. As of August 31, 1994, approximately $3,700 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Expense PMF voluntarily subsidized all
Subsidy 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, 1994, PMF subsidized $270,113 ($.02 per share for Class A and C
shares; .17% of average net assets) of the Series' expenses. The Series is not
required to reimburse PMF for such subsidy.
Note 5. Portfolio Purchases and sales of port-
Securities folio securities, excluding
short-term investments, for the year ended August
31, 1994 were $126,882,962 and $111,569,126, respectively.
The cost basis of investments for federal income tax purposes as of August
31, 1994 was $145,737,067 and,
B-89
<PAGE>
accordingly, net unrealized depreciation $1,395,512 (gross unrealized
appreciation--$3,604,800; gross unrealized depreciation--$5,000,312).
The Series will elect to treat net capital losses of approximately $573,400
incurred in the ten month period ended August 31, 1994 as having been incurred
in the following fiscal year.
At August 31, 1994 the Series sold 75 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts was $6,948,281. The value of such contracts on August 31, 1994
was $6,862,500, thereby resulting in an unrealized gain of $85,781.
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 commencing in February 1995. Offering of Class B shares commenced on
August 1, 1994.
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, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
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 increase in shares
outstanding................. (88,776) $ (207,004)
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 4,710,788 $ 49,235,380
Shares issued in reinvestment
of dividends and
distributions............... 358,775 3,737,322
Shares reacquired............. (1,530,543) (15,961,401)
---------- ------------
Net increase in shares
outstanding................. 3,539,020 $ 37,011,301
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Class C
- ------------------------------
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
---------- ------------
---------- ------------
July 26, 1993* through
August 31, 1993:
Shares sold................... 288,326 $ 3,093,863
Shares issued in reinvestment
of dividends................ 235 2,548
Shares reacquired............. (567) (6,040)
---------- ------------
Net increase in shares
outstanding................. 287,994 $ 3,090,371
---------- ------------
---------- ------------
</TABLE>
- ------------------
* Commencement of offering of Class C shares.
B-90
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
------------------------------------------------------- ----------- --------------------------
December 28, August 1, July 26,
1990* 1994(D)(D)(D) Year 1993(D)(D)
Years Ended August 31, Through through Ended Through
-------------------------------------- August 31, August 31, August 31, August 31,
1994 1993 1992 1991 1994 1994 1993
---------- ---------- ---------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period............... $ 10.87 $ 10.27 $ 9.76 $ 9.55 $ 9.95 $ 10.87 $ 10.58
---------- ---------- ---------- ------------- ----------- ----------- -----------
Income from investment
operations
Net investment
income(D)............... .59 .57 .65 .44 .04 .48 .03
Net realized and
unrealized gain (loss)
on investment
transactions............ (.76) .73 .51 .21 (.04) (.76) .29
---------- ---------- ---------- ------------- ----------- ----------- -----------
Total from investment
operations............ (.17) 1.30 1.16 .65 -- (.28) .32
---------- ---------- ---------- ------------- ----------- ----------- -----------
Less distributions
Dividends from net
investment income....... (.59) (.57) (.65) (.44) (.04) (.48) (.03)
Distributions from net
realized gains.......... (.20) (.13) -- -- -- (.20) --
---------- ---------- ---------- ------------- ----------- ----------- -----------
Total distributions..... (.79) (.70) (.65) (.44) (.04) (.68) (.03)
---------- ---------- ---------- ------------- ----------- ----------- -----------
Net asset value, end of
period.................. $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 9.91 $ 9.91 $ 10.87
---------- ---------- ---------- ------------- ----------- ----------- -----------
---------- ---------- ---------- ------------- ----------- ----------- -----------
TOTAL RETURN#:............ (1.69)% 13.78% 12.26% 6.90% (0.05)% (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $134,849 $148,900 $104,335 $63,929 $582 $11,185 $3,132
Average net assets
(000)................... $146,489 $123,820 $ 82,893 $41,528 $118 $ 9,280 $1,038
Ratios to average net
assets(D):
Expenses, including
distribution fees..... .20% .20% 0.09% 0 .70%** .95% .95%**
Expenses, excluding
distribution fees..... .20% .20% 0.09% 0 .20%** .20% .20%**
Net investment income... 5.67% 5.94% 6.41% 6.68%** 6.21%** 4.99% 5.19%**
Portfolio turnover........ 75% 68% 56% 39% 75% 75% 68%
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of expense subsidy and fee waiver.
(D)(D) Commencement of offering of Class C shares. Prior to
August 1, 1994, Class C shares were called Class
D shares.
(D)(D)(D) Commencement of offering of Class B shares.
# Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and
includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
See Notes to Financial Statements.
B-91
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Florida Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Florida Series, including the portfolio of
investments, as of August 31, 1994, 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 three 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, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Florida Series, as of August 31, 1994, 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 17, 1994
B-92
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
GEORGIA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.2%
Atlanta Urban Res. Fin.
Auth.,
Dorm. Fac. Rev.,
Atlanta Gen. Oblig.,
Aa $ 585(D) 7.10%, 12/1/10.......... $ 653,240
Clark Atlanta Univ.
Proj.,
NR 935(D) 9.25%, 6/1/10........... 1,142,926
Atlanta Wtr. & Swr.
Rev.,
Aa 500 4.75%, 1/1/23........... 398,710
Bartow Cnty. Sch. Dist.,
Gen. Oblig.,
Aaa 500 5.70%, 5/1/14,
M.B.I.A............... 478,870
Clarke Cnty. Sch. Dist.,
Aaa 425 5.50%, 7/1/08,
F.G.I.C............... 415,310
Clayton Cnty. Solid
Waste Mgmt. Auth.
Rev.,
Aa 500 6.50%, 2/1/12, Ser. A... 512,685
Clayton Cnty. Wtr.
Auth.,
Wtr. & Sewage Rev.,
Aaa 500(D) 6.65%, 5/1/12........... 552,730
Cobb Cnty. Kennestone
Hosp.,
Auth. Rev.,
5.00%, 4/1/24, Ser. A,
Aaa 750 M.B.I.A................. 618,173
Columbus Hosp. Auth.
Rev.,
Antic. Cert., St.
Francis Hosp.,
Aaa 500 8.25%, 1/1/07, B.I.G.... 548,650
DeKalb Cnty. Wtr. & Swr.
Rev.,
Aa 750 5.25%, 10/1/23.......... 649,995
DeKalb Private Hosp.
Auth. Rev.,
Wesley Svcs. Inc.
Proj.,
Aa3 500 8.25%, 9/1/15........... 526,385
Douglasville-Douglas
Cnty.,
Wtr. & Swr. Auth.
Rev.,
Aaa 750 5.625%, 6/1/15,
A.M.B.A.C............. 709,980
Downtown Savannah Auth.
Rev., Chatham Co.
Proj.,
Aa 250 5.00%, 1/1/11........... 221,790
Floyd Cnty. Wtr. & Swr.
Rev.,
Aaa 250 5.10%, 11/1/13,
F.G.I.C............... 220,148
Forsyth Cnty. Sch. Dist.
Dev. Rev.,
A1 $ 500 6.75%, 7/1/16, Ser. A... $ 542,050
Fulco Hosp. Auth. Rev.,
Antic. Cert., Baptist
Hlth.,
A 750 6.375%, 9/1/22, Ser.
B..................... 690,203
Shepherd Spinal Ctr.
Proj.,
Aa3 750 7.75%, 10/1/08, Ser.
A..................... 801,487
Fulton Cnty. Bldg. Auth.
Rev.,
Human Res. & Gov't.
Facs. Proj.,
Aa 250 7.00%, 1/1/10........... 268,887
Judicial Ctr. Proj.,
Aa 1,325 Zero Coupon, 1/1/11..... 486,434
Fulton Cnty. Sch. Dist.
Rev.,
Lindbrook Square
Fndtn.,
Aa 750@ 6.375%, 5/1/17.......... 793,162
Georgia Mun. Elec. Auth.
Pwr.
Rev. Ref.,
A1 250 5.30%, 1/1/07, Ser. Z... 240,563
A1 250 6.00%, 1/1/14, Ser. A... 243,562
A1 475 6.25%, 1/1/17, Ser. B... 477,223
Georgia Mun. Gas Auth.
Rev.,
Southern Storage Gas
Proj.,
A-* 600 6.40%, 7/1/14........... 601,164
Green Cnty. Dev. Auth.,
Ind. Park Rev.,
NR 680 6.875%, 2/1/04.......... 746,905
Henry Cnty. Sch. Dist.
Dev. Rev.,
A 750 6.45%, 8/1/11, Ser. A... 779,827
Houston Cnty. Georgia
Sch. Dist.,
Intergovernmental
Contract Trust,
Aaa 250 6.00%, 3/1/14,
M.B.I.A............... 248,860
Marietta Dev. Auth.
Rev.,
Life Coll. Inc. Proj.,
Aaa 500 7.20%, 12/1/09,
C.G.I.C............... 543,375
Monroe Cnty. Dev. Auth.,
Poll. Ctrl. Rev., Gulf
Pwr. Co. Proj.,
A2 500 10.50%, 12/1/14......... 518,600
Peach Cnty. Sch. Dist.,
Aaa 500 6.40%, 2/1/19,
M.B.I.A............... 513,330
</TABLE>
B-93 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa $ 750 5.40%, 7/1/07,
M.B.I.A............... $ 746,497
Aaa 750 5.50%, 7/1/13,
M.B.I.A............... 714,458
Aaa 450(D)(D) 8.393%, 7/1/20,
F.S.A................. 421,875
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
7.65%, 10/15/22, Ser.
1-B,
Aaa 555 G.N.M.A................. 574,836
Savannah Hosp. Auth.
Rev.,
Candler Hosp.,
Baa 500 7.00%, 1/1/23........... 489,680
Toombs Cnty. Hosp.,
Dr. John Meadows Mem.
Hosp.,
BBB* 500 7.00%, 12/1/17.......... 492,870
Virgin Islands Pub. Fin.
Auth. Rev., Hwy.
Trans. Trust Fund,
NR 200 7.25%, 10/1/18, Ser.
A..................... 206,324
Virgin Islands Wtr. &
Pwr. Auth., Wtr. Sys.
Rev.,
NR 300 8.50%, 1/1/10, Ser. A... 329,568
-----------
Total long-term
investments
(cost $19,490,632).... 20,121,332
-----------
SHORT-TERM INVESTMENT--1.4%
Georgia Hosp. Equip.
Fin. Auth., Pooled
Hosp. Loan, Ser. 85,
3.25%, 9/1/94, F.R.D.D.
Aaa 300 (cost $300,000)....... 300,000
-----------
Total Investments--98.6%
(cost $19,790,632; Note
4).................... 20,421,332
Other assets in excess
of
liabilities--1.4%..... 282,079
-----------
Net Assets--100%........ $20,703,411
-----------
-----------
</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.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of these 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.
* Standard & Poor's rating.
@ Pledged as initial margin on futures contracts.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-94 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $19,790,632)................................................... $20,421,332
Cash....................................................................................... 44,045
Interest receivable........................................................................ 336,478
Receivable for Series shares sold.......................................................... 23,025
Other assets............................................................................... 780
---------------
Total assets........................................................................... 20,825,660
---------------
Liabilities
Accrued expenses........................................................................... 55,610
Payable for Series shares reacquired....................................................... 29,965
Dividends payable.......................................................................... 14,171
Management fee payable..................................................................... 8,830
Distribution fee payable................................................................... 8,444
Due to broker-variation margin............................................................. 4,219
Deferred trustees' fees.................................................................... 1,010
---------------
Total liabilities...................................................................... 122,249
---------------
Net Assets................................................................................. $20,703,411
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................... $ 18,498
Paid-in capital in excess of par......................................................... 20,109,747
---------------
20,128,245
Accumulated net realized loss on investments............................................. (72,690)
Net unrealized appreciation on investments............................................... 647,856
---------------
Net assets, August 31, 1994.............................................................. $20,703,411
---------------
---------------
Class A:
Net asset value and redemption price per share
($1,181,577 / 105,555 shares of beneficial interest issued and outstanding)............ $11.19
Maximum sales charge (3.0% of offering price)............................................ .35
---------------
Maximum offering price to public......................................................... $11.54
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($19,521,634 / 1,744,219 shares of beneficial interest issued and outstanding)......... $11.19
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($199.58 / 17.83 shares of beneficial interest issued and outstanding)................. $11.19
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-95
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest........................... $ 1,345,847
------------
Expenses
Management fee..................... 108,130
Distribution fee--Class A.......... 1,134
Distribution fee--Class B.......... 102,458
Custodian's fees and expenses...... 58,000
Registration fees.................. 28,000
Reports to shareholders............ 19,500
Transfer agent's fees and
expenses........................... 16,000
Legal fees......................... 15,000
Audit fee.......................... 10,500
Trustees' fees..................... 3,375
Miscellaneous...................... 1,048
------------
Total expenses................... 363,145
------------
Net investment income................ 982,702
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ (98,821)
Financial futures transactions..... 95,281
------------
(3,540)
------------
Net change in unrealized
appreciation/
depreciation on:
Investments........................ (1,436,560)
Financial futures contracts........ 28,718
------------
(1,407,842)
------------
Net loss on investments.............. (1,411,382)
------------
Net Decrease in Net Assets
Resulting from Operations............ $ (428,680)
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income... $ 982,702 $ 926,363
Net realized gain (loss)
on investment
transactions.......... (3,540) 312,202
Net change in unrealized
appreciation/depreciation
of investments........ (1,407,842) 1,071,362
------------ -----------
Net increase (decrease)
in net assets
resulting from
operations............ (428,680) 2,309,927
------------ -----------
Dividends and
distributions (Note 1)
Dividends from net
investment income
Class A............... (55,820) (24,841)
Class B............... (926,882) (901,522)
------------ -----------
(982,702) (926,363)
------------ -----------
Distributions from net
realized gains
Class A............... (15,680) (8,466)
Class B............... (302,050) (631,421)
------------ -----------
(317,730) (639,887)
------------ -----------
Series share transactions
(Note 6)
Net proceeds from shares
sold.................. 3,261,528 4,700,499
Net asset value of
shares issued in
reinvestment of
dividends and
distributions......... 863,092 1,006,072
Cost of shares
reacquired............ (3,609,847) (2,411,522)
------------ -----------
Net increase in net
assets from Series
share transactions.... 514,773 3,295,049
------------ -----------
Total increase
(decrease).............. (1,214,339) 4,038,726
Net Assets
Beginning of year......... 21,917,750 17,879,024
------------ -----------
End of year............... $ 20,703,411 $21,917,750
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-96
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Georgia Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting pol-
icies 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. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-97
<PAGE>
Note 2. Agreements The Fund has a manage-
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $13,200 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $29,000 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$14,000 for the services of PMFS. As of August 31, 1994, approximately $1,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $5,648,000 and $5,611,424, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1994 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes is $630,700 (gross unrealized appreciation--$978,710, gross
unrealized depreciation--$348,010).
At August 31, 1994, the Series sold 15 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts was $1,389,656. The value of such contracts on August 31, 1994
was $1,372,500, thereby resulting in an unrealized gain of $17,156.
The Fund will elect to treat net capital losses of approximately $45,000
incurred in the ten month period ended August 31, 1994 as having been incurred
in the following fiscal year.
B-98
<PAGE>
Note 5. Expense PMF has agreed to subsidize
Subsidy expenses so that total Series
operating expenses do not exceed 1.40%, 1.80% and
2.05% of the average net assets of the Class A shares, Class B shares and Class
C shares, respectively. No subsidy was required for the year ended August 31,
1994.
The Series currently offers
Note 6. Capital
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 commencing in or about February, 1995.
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 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- -------- -----------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold...................... 40,971 $ 479,185
Shares issued in reinvestment of
dividends and distributions.... 3,476 40,440
Shares reacquired................ (30,202) (352,696)
-------- -----------
Net increase in shares
outstanding.................... 14,245 $ 166,929
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 76,007 $ 894,503
Shares issued in reinvestment of
dividends and distributions.... 1,747 20,330
Shares reacquired................ (1,557) (18,441)
-------- -----------
Net increase in shares
outstanding.................... 76,197 $ 896,392
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold...................... 237,894 $ 2,782,143
Shares issued in reinvestment of
dividends and distributions.... 70,614 822,652
Shares reacquired................ (281,823) (3,257,151)
-------- -----------
Net increase in shares
outstanding.................... 26,685 $ 347,644
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 323,985 $ 3,805,996
Shares issued in reinvestment of
dividends and distributions.... 85,416 985,742
Shares reacquired................ (206,341) (2,393,081)
-------- -----------
Net increase in shares
outstanding.................... 203,060 $ 2,398,657
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class C
- ---------------------------------
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold...................... 18 $ 200
-------- -----------
-------- -----------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-99
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
GEORGIA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A
----------------------------------------------------- Class B
January 22, ------------------------------------------
1990(D)(D)
Year Ended August 31, Through Year Ended August 31,
--------------------------------------- August 31, ------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991
------------ ------ ------ ------ ----------- ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $12.12 $11.69 $11.39 $11.05 $ 11.26 $ 12.12 $ 11.69 $ 11.39 $ 11.05
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Income from investment
operations
Net investment income........... .57 .62 .65) .64 .41 .52 .57 .61) .60
Net realized and unrealized gain
(loss) on investment
transactions.................. (.76) .85 .54 .43 (.21) (.76) .85 .54 .43
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Total from investment
operations.................. (.19) 1.47 1.19 1.07 .20 (.24) 1.42 1.15 1.03
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Less distributions
Dividends from net investment
income........................ (.57) (.62) (.65) (.64) (.41) (.52) (.57) (.61)
(.60)
Distributions from net realized
gains......................... (.17) (.42) (.24) (.09) -- (.17) (.42) (.24)
(.09)
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Total distributions........... (.74) (1.04) (.89) (.73) (.41) (.69) (.99) (.85)
(.69)
------ ------ ------ ------ ----------- ------------ ------- ------- -------
Net asset value, end of
period........................ $11.19 $12.12 $11.69 $11.39 $ 11.05 $ 11.19 $ 12.12 $ 11.69 $ 11.39
------ ------ ------ ------ ----------- ------------ ------- ------- -------
------ ------ ------ ------ ----------- ------------ ------- ------- -------
TOTAL RETURN#:.................. (1.58)% 13.28% 10.84% 10.03% 1.71% (1.98)% 12.83% 10.40%
9.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $1,182 $1,107 $ 177 $ 102 $ 83 $ 19,522 $20,811 $17,702 $17,722
Average net assets (000)........ $1,134 $ 475 $ 155 $ 98 $ 21 $ 20,492 $18,437 $17,436 $19,008
Ratios to average net assets:##
Expenses, including
distribution fees........... 1.30% 1.27% 1.24%(D) 1.70% 1.46%* 1.70% 1.67% 1.64%(D)
2.08%
Expenses, excluding
distribution fees........... 1.20% 1.17% 1.14%(D) 1.60% 1.36%* 1.20% 1.17% 1.14%(D)
1.58%
Net investment income......... 4.92% 5.29% 5.68%(D) 5.67% 5.92%* 4.52% 4.89% 5.28%(D)
5.36%
Portfolio turnover.............. 27% 41% 58% 33% 49% 27% 41% 58%
33%
<CAPTION>
Class C
-----------
August 1,
1994(D)(D)(D)
Through
August 31,
1990 1994
------- -----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 11.23 $ 11.23
------- -----------
Income from investment
operations
Net investment income........... .65 .04
Net realized and unrealized gain
(loss) on investment
transactions.................. (.18) (.04)
------- -----------
Total from investment
operations.................. .47 --
------- -----------
Less distributions
Dividends from net investment
income........................ (.65) (.04)
Distributions from net realized
gains......................... -- --
------- -----------
Total distributions........... (.65) (.04)
------- -----------
Net asset value, end of
period........................ $ 11.05 $ 11.19
------- -----------
------- -----------
TOTAL RETURN#:.................. 4.18% (0.06)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $20,310 $ 200@
Average net assets (000)........ $22,614 $ 199@
Ratios to average net assets:##
Expenses, including
distribution fees........... 1.67% 2.05%*
Expenses, excluding
distribution fees........... 1.22% 1.30%*
Net investment income......... 5.85% 4.68%*
Portfolio turnover.............. 49% 27%
- ---------------
<FN>
* Annualized.
(D) Net of expense subsidy.
(D)(D) Commencement of offering of Class A shares.
(D)(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a
purchase of shares on the first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods of less than a full year are not
annualized.
## Because of the events referred to in (D)(D)(D) and the timing of such, the ratios for the Class C shares
are not necessarily comparable to that of Class A and B shares and are not necessarily indicative of
future ratios.
@ Figures are actual and are not rounded to the nearest thousand.
</TABLE>
See Notes to Financial Statements.
B-100
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Georgia Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Georgia Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 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, Georgia Series, as of August 31, 1994, 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 17, 1994
B-101
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MARYLAND SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--94.0%
Anne Arundel Cnty.,
Cons. Gen. Impvt.,
Aa1 $ 1,000 6.00%, 7/15/11.......... $ 1,015,540
Baltimore Cert. of
Part.,
Aaa 1,000 5.25%, 4/1/16,
M.B.I.A............... 885,570
Pension Funding,
M.B.I.A.,
Aaa 1,000(D) 7.25%, 4/1/16, Ser. A... 1,124,080
Baltimore Econ. Dev.
Lease
Rev., Armistead
Partnership,
BBB+* 1,000 7.00%, 8/1/11........... 1,024,440
Baltimore Maryland Conv.
Ctr. Rev.,
Aaa 1,075 5.75%, 9/1/08,
F.G.I.C............... 1,076,602
Aaa 1,250 6.15%, 9/1/19,
F.G.I.C............... 1,243,675
Baltimore Util. Pub.
Impvt.,
7.00%, 10/15/09,
Ser. A, M.B.I.A....... 557,675
Aaa 500
Charles Cnty., Gen.
Oblig.,
A1 1,580(D) 6.375%, 12/1/03......... 1,713,384
Dist. of Columbia Met.
Area
Transit Auth. Gross
Rev.,
Aaa 600 6.00%, 7/1/09,
F.G.I.C............... 611,166
Aaa 1,500 5.25%, 7/1/14,
F.G.I.C............... 1,330,650
Gaithersburg Econ. Dev.
Rev.,
Asbury Methodist,
NR 1,000 5.50%, 1/1/20........... 874,250
Harford Cnty.,
Cons. Pub. Impvt.,
Aa 1,500 4.90%, 12/1/10.......... 1,335,810
Howard Cnty., Met.
Dist.,
Aa1 2,115 Zero Coupon, 8/15/09,
Ser. B................ 896,781
Kent Cnty., Coll. Rev.
Proj. & Ref.,
Washington Coll.
Proj.,
Baa1 1,500 7.70%, 7/1/18........... 1,631,910
Maryland St. Hlth. &
Higher Edl. Facs.
Auth. Rev.,
Baltimore Cnty., Gen.
Hosp.,
Aaa 750(D) 7.75%, 7/1/13,
A.M.B.A.C............. 839,895
Broadmead Proj.,
NR 500 7.625%, 7/1/10.......... 530,070
Maryland St. Hlth. &
Higher Edl. Facs.
Auth. Rev.,
Church Hosp.,
A $ 500 8.00%, 7/1/13........... $ 548,000
Franklin Square Hosp.,
Aaa 1,000 7.50%, 7/1/19,
M.B.I.A............... 1,115,870
Good Samaritan Hosp.,
A 1,100 5.75%, 7/1/19........... 1,011,527
Hartford Mem. Hosp.
& Fallston,
Baa1 750 8.50%, 7/1/14........... 820,013
Howard Cnty. Gen. Hosp.,
Baa1 1,000(D) 7.00%, 7/1/17........... 1,080,850
John Hopkins Med. Ctr.,
Aa 2,000 5.00%, 7/1/23........... 1,651,560
Montgomery Gen. Hosp.,
Baa1 1,500 5.00%, 7/1/23........... 1,221,735
No. Arundel Hosp.,
Aaa 1,250(D) 7.875%, 7/1/21,
B.I.G................. 1,405,712
Peninsula Reg. Med.,
A 1,200 5.00%, 7/1/23........... 966,756
Roland Park Proj.,
NR 1,000 7.75%, 7/1/12........... 1,076,020
Sinai Hosp. of
Baltimore,
Aaa 500 5.25%, 7/1/19,
A.M.B.A.C............. 433,915
Aaa 600 5.25%, 7/1/23,
A.M.B.A.C............. 515,952
Maryland St. Hsg. &
Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev.
Proj.,
Aa 850 7.125%, 4/1/14, Sixth
Ser................... 880,507
Aa 925@ 7.70%, 4/1/15, Fourth
Ser................... 965,274
Aa 750 8.00%, 4/1/18, Third
Ser................... 808,035
Maryland St. Ind. Auth.
Econ. Dev.,
Holy Cross Hlth. Sys.
Corp.,
A1 1,500 5.50%, 12/1/15.......... 1,358,700
Maryland St. Ind. Dev.
Fin. Auth. Rev.,
Amer. Ctr. For
Physics,
BBB* 1,000 6.625%, 1/1/17.......... 994,680
</TABLE>
B-102 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
Maryland Wtr. Quality
Fin. Admin.,
Revolving Loan Fund
Rev.,
A1 $ 1,000 7.25%, 9/1/12, Ser. B... $ 1,100,690
Aa 500 5.40%, 9/1/13........... 461,470
Montgomery Cnty. Hsg.
Opportunities Comn.,
Multifamily Mtge.
Rev.,
A 1,000 7.00%, 7/1/23........... 1,024,100
Sngl. Fam. Mtge. Rev.,
Aa 1,440 7.625%, 7/1/17, Ser.
A..................... 1,487,146
Montgomery Cnty., Cons.
Pub. Impvt.,
Aaa 450 9.75%, 6/1/01........... 569,344
Northeast Waste Disp.
Auth.,
Baltimore City Sludge
Proj.,
NR 957 7.25%, 7/1/07........... 959,230
Montgomery Cnty. Proj.,
A 2,200 6.30%, 7/1/16........... 2,141,304
Prince Georges Cnty.
Hsg. Auth. Mtge. Rev.,
Laurel Apts.,
AAA* 750 6.25%, 4/20/20,
F.N.M.A............... 747,075
Prince Georges Cnty.,
Cons. Pub. Impvt.,
A1 750 5.00%, 1/15/09.......... 675,037
Hosp. Rev., Dimensions
Hlth. Corp.,
A 1,250 5.30%, 7/1/24........... 1,032,150
Stormwater Mgmt.,
Aa 1,140 6.50%, 3/15/03.......... 1,231,314
Puerto Rico Comnwlth.
Aqueduct & Swr. Auth.
Rev.,
Aaa 100 10.125%, 7/1/99......... 121,272
Aaa 225 10.25%, 7/1/09.......... 310,894
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 1,000(D)(D) 8.39%, 7/1/20, F.S.A.... 937,500
Puerto Rico Tel. Auth.
Rev.,
M.B.I.A., Ser. I,
Aaa 1,000(D)(D) 7.38%, 1/16/15.......... 868,750
Virgin Islands Pub. Fin.
Auth. Rev.,
Ref. Matching Loan
Notes,
NR 600 7.25%, 10/1/18, Ser.
A..................... 618,972
Virgin Islands Wtr. & Pwr. Auth.,
Wtr. Sys. Rev.,
NR $ 600 8.50%, 1/1/10, Ser. A... $ 659,136
Washington Suburban San. Dist.,
Gen. Construction,
Aa1 1,500 5.25%, 6/1/12........... 1,370,340
Aa1 1,000 5.25%, 6/1/16, Ser. 2... 904,940
-----------
Total long-term
investments
(cost $50,079,943).... 50,767,268
-----------
SHORT-TERM INVESTMENTS--5.0%
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 2,700 2.90%, 9/7/94, Ser.
85.................... 2,700,000
-----------
Total Investments--99.0%
(cost $52,779,943; Note
4).................... 53,467,268
Other assets in excess
of
liabilities--1.0%..... 542,358
-----------
Net Assets--100%........ $54,009,626
-----------
-----------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.N.M.A.--Federal National Mortgage Association.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par, or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's Rating.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
@ Pledged as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
</TABLE>
B-103 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1994
-----------
<S> <C>
Investments, at value (cost $52,779,943)........................................................ $53,467,268
Cash............................................................................................ 127,565
Interest receivable............................................................................. 715,877
Receivable for Fund shares sold................................................................. 4,241
Other assets.................................................................................... 1,720
-----------
Total assets.................................................................................. 54,316,671
-----------
Liabilities
Payable for Fund shares reacquired.............................................................. 169,424
Accrued expenses................................................................................ 42,893
Dividends payable............................................................................... 40,085
Management fee payable.......................................................................... 23,061
Distribution fee payable........................................................................ 22,135
Due to broker - variation margin payable........................................................ 8,437
Deferred trustee fees........................................................................... 1,010
-----------
Total liabilities............................................................................. 307,045
-----------
Net Assets...................................................................................... $54,009,626
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par......................................................... $ 50,616
Paid-in capital in excess of par.............................................................. 52,925,885
-----------
52,976,501
Accumulated net realized gain on investments.................................................. 311,487
Net unrealized appreciation of investments.................................................... 721,638
-----------
Net assets, August 31, 1994................................................................... $54,009,626
-----------
-----------
Class A:
Net asset value and redemption price per share ($2,709,407 / 254,247 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 ($51,198,286 / 4,797,823 shares
of beneficial interest issued and outstanding)............................................... $10.67
-----------
-----------
Class C:
Net asset value, offering price and redemption price per share ($101,933 / 9,552 shares of
beneficial interest issued and outstanding)................................................. $10.67
-----------
-----------
</TABLE>
See Notes to Financial Statements.
B-104
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................... $ 3,559,061
-----------
Expenses
Management fee......................... 290,509
Distribution fee--Class A.............. 2,877
Distribution fee--Class B.............. 276,113
Distribution fee--Class C.............. 18
Custodian's fees and expenses.......... 86,000
Transfer agent's fees and expenses..... 38,000
Reports to shareholders................ 27,000
Registration fees...................... 19,100
Legal fees............................. 15,000
Audit fee.............................. 10,500
Trustees' fees......................... 3,375
Miscellaneous.......................... 5,012
-----------
Total expenses....................... 773,504
-----------
Net investment income.................. 2,785,557
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions................ 648,535
Financial futures contract
transactions........................... 9,600
-----------
658,135
-----------
Net change in unrealized
appreciation/depreciation of:
Investments............................ (4,779,083)
Financial futures contracts............ 63,188
-----------
(4,715,895)
-----------
Net loss on investments.................. (4,057,760)
-----------
Net Decrease in Net Assets
Resulting from Operations................ $(1,272,203)
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) --------------------------
in Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income........ $ 2,785,557 $ 2,860,729
Net realized gain on
investment transactions.... 658,135 1,079,334
Net change in unrealized
appreciation/depreciation
of investments............. (4,715,895) 2,218,425
------------ -----------
Net increase (decrease) in
net assets resulting from
operations................. (1,272,203) 6,158,488
------------ -----------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A.................... (149,002) (112,413)
Class B.................... (2,636,439) (2,748,316)
Class C.................... (116) --
------------ -----------
(2,785,557) (2,860,729)
------------ -----------
Distributions from net
realized gains
Class A.................... (53,117) (18,889)
Class B.................... (1,057,112) (562,219)
------------ -----------
(1,110,229) (581,108)
------------ -----------
Series share transactions (Note
5)
Net proceeds from shares
sold....................... 5,404,805 8,738,496
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 2,685,739 2,374,657
Cost of shares reacquired.... (9,441,263) (5,949,464)
------------ -----------
Net increase (decerase) in
net assets from Series
share transactions......... (1,350,719) 5,163,689
------------ -----------
Total increase (decrease)...... (6,518,708) 7,880,340
Net Assets
Beginning of year.............. 60,528,334 52,647,994
------------ -----------
End of year.................... $ 54,009,626 $60,528,334
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-105
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this
B-106
<PAGE>
agreement, PMF has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PMF has entered into a
subadvisory agreement with The Prudential Investment Corporation (``PIC''). PIC
furnishes investment advisory services in connection with the management of the
Fund. PMF pays for the services of PIC, the cost of compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $27,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $64,000 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$27,200 for the services of PMFS. As of August 31, 1994, 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 Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $21,768,235 and $24,842,862, respectively.
At August 31, 1994, the Fund sold 30 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts is $2,779,313. The value of such contracts on August 31, 1994
was $2,745,000, thereby resulting in an unrealized gain of $34,313.
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, 1994, net unrealized appreciation of investments for federal
income tax purposes is $687,325 (gross unrealized appreciation--$2,119,312;
gross unrealized depreciation $1,431,987).
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 commencing in or about February 1995.
B-107
<PAGE>
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
-------- -----------
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
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 178,669 $ 2,012,997
Shares issued in reinvestment
of dividends and
distributions.................. 9,349 104,954
Shares reacquired................ (56,465) (642,673)
-------- -----------
Net increase in shares
outstanding.................... 131,553 $ 1,475,278
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
<S> <C> <C>
-------- -----------
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)
-------- -----------
-------- -----------
Year ended August 31, 1993:
Shares sold...................... 598,587 $ 6,725,499
Shares issued in reinvestment
of dividends and
distributions.................. 202,460 2,269,703
Shares reacquired................ (473,226) (5,306,791)
-------- -----------
Net increase in shares
outstanding.................... 327,821 $ 3,688,411
-------- -----------
-------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class C
<S> <C> <C>
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
-------- -----------
-------- -----------
<FN>
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-108
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------- --------------------------------
January 22,
1990(D)
Year Ended August 31, through Year Ended August 31,
--------------------------------------- August 31, --------------------------------
1994 1993 1992 1991 1990 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------ ------ ------ ------ ----------- ------------ ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $11.64 $11.11 $10.67 $10.23 $ 10.44 $ 11.65 $ 11.12 $ 10.68
------ ------ ------ ------ ----------- ------------ ------- -------
Income from investment operations
Net investment income............ .57 .62 .63 .67 .40 .53 .58 .59
Net realized and unrealized gain
(loss) on investment
transactions................... (.77) .65 .44 .44 (.21) (.77) .65 .44
------ ------ ------ ------ ----------- ------------ ------- -------
Total from investment
operations................... (.20) 1.27 1.07 1.11 .19 (.24) 1.23 1.03
------ ------ ------ ------ ----------- ------------ ------- -------
Less distributions
Dividends from net investment
income......................... (.57) (.62) (.63) (.67) (.40) (.53) (.58) (.59)
Distributions from net realized
gains.......................... (.21) (.12) -- -- -- (.21) (.12) --
------ ------ ------ ------ ----------- ------------ ------- -------
Total distributions............ (.78) (.74) (.63) (.67) (.40) (.74) (.70) (.59)
------ ------ ------ ------ ----------- ------------ ------- -------
Net asset value, end of period... $10.66 $11.64 $11.11 $10.67 $ 10.23 $ 10.67 $ 11.65 $ 11.12
------ ------ ------ ------ ----------- ------------ ------- -------
------ ------ ------ ------ ----------- ------------ ------- -------
TOTAL RETURN#:................... (1.75)% 11.89% 10.35% 10.84% 1.71% (2.13)% 11.43% 9.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $2,709 $2,930 $1,335 $ 804 $ 349 $ 51,198 $57,598 $51,313
Average net assets (000)......... $2,877 $2,068 $1,080 $ 518 $ 141 $ 55,223 $53,780 $50,970
Ratios to average net assets:##
Expenses, including
distribution fees............ .95% .96% .96% 1.10% 1.01%* 1.35% 1.36% 1.37%
Expenses, excluding
distribution fees............ .85% .86% .86% 1.00% .91%* .85% .86% .87%
Net investment income.......... 5.18% 5.51% 5.80% 6.07% 6.31%* 4.77% 5.11% 5.42%
Portfolio turnover............... 40% 41% 34% 18% 46% 40% 41% 34%
<CAPTION>
Class C
----------
August 1,
1994(D)(D)
through
August 31,
1991 1990 1994
<S> <C> <C> <C>
------- ------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 10.23 $ 10.48 $ 10.70
------- ------- ----------
Income from investment operations
Net investment income............ .63 .62 .05
Net realized and unrealized gain
(loss) on investment
transactions................... .45 (.25) (.03)
------- ------- ----------
Total from investment
operations................... 1.08 .37 .02
------- ------- ----------
Less distributions
Dividends from net investment
income......................... (.63) (.62) (.05)
Distributions from net realized
gains.......................... -- -- --
------- ------- ----------
Total distributions............ (.63) (.62) (.05)
------- ------- ----------
Net asset value, end of period... $ 10.68 $ 10.23 $ 10.67
------- ------- ----------
------- ------- ----------
TOTAL RETURN#:................... 10.49% 3.58% .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).......................... $51,110 $48,226 $ 102
Average net assets (000)......... $48,422 $48,573 $ 31
Ratios to average net assets:##
Expenses, including
distribution fees............ 1.49% 1.40% 2.21%*
Expenses, excluding
distribution fees............ .99% .92% 1.47%*
Net investment income.......... 5.70% 5.95% 4.75%*
Portfolio turnover............... 18% 46% 40%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
## Because of the event referred to in (D)(D) and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that of
Class A or B shares and are not necessarily indicative of future
ratios.
</TABLE>
See Notes to Financial Statements.
B-109
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Maryland Series
We have audited the statement of assets and liabilities of Prudential
Municipal Series Fund, Maryland Series, including the portfolio of investments,
as of August 31, 1994, 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, 1994 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Maryland Series, as of August 31, 1994, 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 17, 1994
B-110
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MASSACHUSETTS SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.4%
Boston Ind. Dev. Fin.
Auth., Swr. Fac. Rev.,
Harbor Elec. Energy
Co. Proj.,
Baa1 $1,500 7.375%, 5/15/15......... $1,565,730
Boston Mass., Gen.
Oblig., Ser. A,
A* 500(D) 9.75%, 1/1/05........... 525,325
Aaa 2,000 7.375%, 2/1/10,
A.M.B.A.C............. 2,254,460
Boston Wtr. & Swr. Comn.
Rev.,
A 495(D) 7.875%, 11/1/13, Ser.
A..................... 539,139
A 875 7.875%, 11/1/13, Ser.
A..................... 947,135
Brockton Mass.,
Baa1 1,030 6.125%, 6/15/18......... 997,946
Gloucester Mass.,
Gen. Oblig.,
Aaa 2,000 5.50%, 11/15/13,
F.S.A................. 1,871,520
Holyoke, Gen. Oblig.,
Sch. Proj.,
Aaa 700 8.10%, 6/15/05,
M.B.I.A............... 824,768
Lowell, Gen. Oblig.,
Baa1 750(D) 7.625%, 2/15/10......... 870,180
Lynn Wtr. & Swr. Comn.,
Gen. Rev., Ser. A,
Aaa 2,100(D) 7.25%, 12/1/10,
M.B.I.A............... 2,382,786
Mass. Bay Trans. Auth.,
A 1,500 6.20%, 3/1/16, Ser. B... 1,508,865
Mass. St. Gen. Oblig.,
A 665 Zero Coupon, 8/1/06,
Ser. A................ 340,360
Mass. St. Hlth. & Edl.
Facs. Auth. Rev.,
Gen. Oblig.,
Aaa 1,500 6.00%, 8/1/09, Ser. C,
F.G.I.C................. 1,518,345
Bentley Coll.,
A 1,325(D) 8.125%, 7/1/17, Ser.
G..................... 1,392,853
Beth Israel Hosp.,
Aaa 1,500(D)(D) 8.472%, 7/1/25,
A.M.B.A.C............. 1,425,000
Beverly Hosp., Ser. D,
Aaa 750 7.30%, 7/1/13,
M.B.I.A............... 828,173
Holy Cross Coll.,
A1 1,500(D) 8.35%, 11/1/07, Ser.
F..................... 1,570,740
Mass. St. Hlth. & Edl.
Facs. Auth. Rev.,
Holyoke Hosp. Rev.,
Baa1 $1,000 6.50%, 7/1/15........... $958,670
Jordan Hosp.,
A-* 1,650 6.875%, 10/1/22......... 1,628,633
Lahey Clinic, Ser. B,
Aaa 1,250 5.375%, 7/1/23,
M.B.I.A............... 1,092,550
New England Med. Ctr.,
A1 1,175 7.875%, 7/1/11, Ser.
E..................... 1,317,856
6.875%, 4/1/22, Ser. D,
Aaa 1,000 A.M.B.A.C............... 1,052,570
Newton-Wellesley Hosp.,
Aaa 2,000 8.00%, 7/1/18, Ser. C,
B.I.G................. 2,234,620
Northeastern Univ., Ser.
D,
Aaa 1,500 7.125%, 10/1/10,
A.M.B.A.C............. 1,629,780
St. Elizabeth Hosp.,
AA* 1,200(D) 7.75%, 8/1/27, Ser. B,
F.H.A................. 1,322,676
Tufts Univ.,
Aaa 1,235(D) 7.40%, 8/1/18, Ser. C... 1,370,726
A1 265 7.40%, 8/1/18, Ser. C... 284,364
Valley Regl. Hlth. Sys.,
AAA* 825 7.00%, 7/1/10........... 891,734
Baa 1,000(D) 8.00%, 7/1/18, Ser. B... 1,165,060
Mass. St. Hsg. Fin.
Agcy. Hsg. Rev.,
Insured Rental, Ser.
A,
Aaa 1,000 6.65%, 7/1/19,
A.M.B.A.C............. 1,008,840
Sngl. Fam. Mtge.,
Aa 1,755 8.10%, 12/1/14, Ser.
6..................... 1,878,692
Aa 415 9.50%, 12/1/16, Ser.
1985A................. 433,256
Aa 985 7.125%, 6/1/25, Ser.
21.................... 1,001,075
Mass. St. Ind. Fin.
Agcy. Rev., Brooks
Sch.,
A 640 5.95%, 7/1/23........... 611,949
Cape Cod Hlth. Sys.,
Aaa 2,000(D) 8.50%, 11/15/20......... 2,393,960
Merrimack College,
BBB-* 990 7.125%, 7/1/12.......... 1,016,948
Springfield College,
Baa1 900 5.625%, 9/15/10......... 838,341
</TABLE>
B-111 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Mass. St. Indl. Fin.
Agcy.,
Poll. Ctrl. Rev.,
Eastern Edison Co.
Project,
Baa $1,000 5.875%, 8/1/08.......... $947,630
Mass. St. Mun. Wholesale Elec.
Co. Pwr. Supply Sys. Rev.,
A 525(D) 6.75%, 7/1/17, Ser. B... 584,503
A 225 6.75%, 7/1/17, Ser. B... 231,980
Mass. St. Port. Auth.
Rev.,
Aa 260 9.375%, 7/1/15, Ser.
B..................... 276,011
Mass. St. Tpke. Auth.
Rev.,
Aaa 450 5.125%, 1/1/23, Ser. A,
F.G.I.C................. 381,551
Mass. St. Wtr. Res.
Auth.,
A 800 5.75%, 12/1/21, Ser.
A,.................... 739,040
Palmer, Gen. Oblig.,
Ser. F,
Aaa 500(D) 7.30%, 3/1/10,
A.M.B.A.C............. 563,100
Plymouth Cnty. Corr. Facs. Proj.,
Cert. of Part.,
A-* 500 7.00%, 4/1/22, Ser. A... 521,240
Puerto Rico Aqueduct &
Swr. Auth. Rev.,
Aaa 400 10.25%, 7/1/09,
E.T.M................. 552,700
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 250 7.00%, 7/1/10,
M.B.I.A............... 280,498
Aaa 750 7.00%, 7/1/10,
A.M.B.A.C............. 841,492
Aaa 1,250 D)(D) 8.393%, 7/1/20,
F.S.A................. 1,171,875
Puerto Rico Elec. Pwr.
Auth. Rev.,
Baa1 450 7.00%, 7/1/06, Ser. S... 503,510
Puerto Rico Hsg. Fin.
Corp.,
Bank & Fin. Agcy.,
Baa 750 5.125%, 12/1/05......... 703,215
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth.
Facs.,
Baa1 $1,000 5.50%, 7/1/21, Ser. M... $894,580
Virgin Islands Pub. Fin.
Auth. Rev.,
Hwy. Trans. Trust
Fund,
NR 400 7.25%, 10/1/18, Ser.
A..................... 412,648
Virgin Islands Wtr. & Pwr. Auth.,
Wtr. Sys. Rev.,
NR 1,000 8.50%, 1/1/10, Ser. A... 1,098,560
-----------
Total long-term
investments
(cost $53,236,506)...... 56,199,758
-----------
Total Investments--97.4%
(cost $53,236,506; Note
4).................... 56,199,758
Other assets in excess
of
liabilities--2.6%..... 1,513,488
-----------
Net Assets--100%........ $57,713,246
-----------
-----------
</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.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
* Standard & Poor's rating.
(D) Prerefunded issues are secured by escrowed cash
and direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-112 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $53,236,506)................................................. $56,199,758
Receivable for investments sold.......................................................... 3,075,712
Interest receivable...................................................................... 883,072
Receivable for Fund shares sold.......................................................... 23,672
Deferred expenses and other assets....................................................... 1,856
---------------
Total assets........................................................................... 60,184,070
---------------
Liabilities
Bank overdraft........................................................................... 1,124,591
Payable for investments purchased........................................................ 1,008,251
Payable for Fund shares reacquired....................................................... 184,769
Accrued expenses......................................................................... 52,888
Dividends payable........................................................................ 50,545
Due to Manager........................................................................... 24,793
Due to Distributors...................................................................... 23,977
Deferred trustees' fees.................................................................. 1,010
---------------
Total liabilities...................................................................... 2,470,824
---------------
Net Assets............................................................................... $57,713,246
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 50,786
Paid-in capital in excess of par....................................................... 55,123,101
---------------
55,173,887
Accumulated net realized loss on investments........................................... (423,893)
Net unrealized appreciation on investments............................................. 2,963,252
---------------
Net assets, August 31, 1994............................................................ $57,713,246
---------------
---------------
Class A:
Net asset value and redemption price per share ($2,293,090 / 201,670 shares of
beneficial interest
issued and outstanding).............................................................. $11.37
Maximum sales charge (3% of offering price)............................................ .35
---------------
Maximum offering price to public....................................................... $11.72
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share ($55,419,940 / 4,876,964
shares of
beneficial interest issued and outstanding).......................................... $11.36
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share ($216.46 / 19.05 shares
of
beneficial interest issued and outstanding).......................................... $11.36
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-113
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................ $ 4,022,765
-----------
Expenses
Management fee...................... 310,614
Distribution fee--Class A........... 2,578
Distribution fee--Class B........... 297,719
Custodian's fees and expenses....... 80,500
Transfer agent's fees and
expenses............................ 32,000
Registration fees................... 20,500
Legal fees.......................... 15,000
Audit fee........................... 10,500
Reports to shareholders............. 8,000
Trustees' fees...................... 3,375
Miscellaneous....................... 1,014
-----------
Total expenses.................... 781,800
-----------
Net investment income................. 3,240,965
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions............. (195,709)
Financial futures contract
transactions........................ (66,531)
-----------
(262,240)
-----------
Net change in unrealized
appreciation/depreciation on:
Investments......................... (3,709,011)
Financial futures contracts......... 61,875
-----------
(3,647,136)
-----------
Net loss on investments............... (3,909,376)
-----------
Net Decrease in Net Assets
Resulting from Operations............. $ (668,411)
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) in ---------------------------
Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 3,240,965 $ 3,093,949
Net realized gain (loss)
on investment
transactions........... (262,240) 1,042,349
Net change in unrealized
appreciation/depreciation
of investments......... (3,647,136) 2,273,453
------------ -----------
Net increase (decrease)
in net assets resulting
from operations........ (668,411) 6,409,751
------------ -----------
Dividends and distributions (Note 1):
Dividends from net
investment income
Class A................ (144,412) (76,855)
Class B................ (3,096,493) (3,017,094)
Class C................ (60) --
------------ -----------
(3,240,965) (3,093,949)
------------ -----------
Distributions from net
realized gains
Class A................ (16,934) --
Class B................ (376,754) --
------------ -----------
(393,688) --
------------ -----------
Series share transactions
(Note 5)
Net proceeds from shares
sold................... 7,355,596 10,228,873
Net asset value of shares
issued in reinvestment
of dividends........... 2,173,313 1,821,686
Cost of shares
reacquired............... (10,958,113) (6,272,800)
------------ -----------
Net increase (decrease)
in net assets from
Series share
transactions........... (1,429,204) 5,777,759
------------ -----------
Total increase
(decrease)............... (5,732,268) 9,093,561
Net Assets
Beginning of year.......... 63,445,514 54,351,953
------------ -----------
End of year................ $ 57,713,246 $63,445,514
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-114
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for short-term capital gains and market discount.
B-115
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''). PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $35,100 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $89,800 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1994, the Series incurred fees of approximately
$27,000 for the services of PMFS. As of August 31, 1994, 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 Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $19,829,440 and $21,559,342, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, at
August 31, 1994, net unrealized appreciation of investments, including
short-term investments for federal income tax purposes was $2,963,252 (gross
unrealized appreciation--$3,554,736, gross unrealized depreciation--$591,484).
The Fund will elect to treat net capital losses of approximately $305,000
incurred in the four month period ended August 31, 1994 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%
B-116
<PAGE>
during the first year. Class B shares will automatically convert to Class A
shares on a quarterly basis approximately seven years after purchase commencing
on or about February 1995.
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 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- -------------- -----------
<S> <C> <C>
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
-------------- -----------
-------------- -----------
Year ended August 31, 1993:
Shares sold...................... 117,227 $ 1,391,818
Shares issued in reinvestment of
dividends...................... 3,409 40,192
Shares reacquired................ (8,122) (95,498)
-------------- -----------
Net increase in shares
outstanding.................... 112,514 $ 1,336,512
-------------- -----------
-------------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- --------------------------------- -------------- -----------
<S> <C> <C>
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)
-------------- -----------
-------------- -----------
Year ended August 31, 1993:
Shares sold...................... 750,946 $ 8,837,055
Shares issued in reinvestment of
dividends...................... 151,724 1,781,494
Shares reacquired................ (529,282) (6,177,302)
-------------- -----------
Net decrease in shares
outstanding.................... 373,388 $ 4,441,247
-------------- -----------
-------------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class C
- ---------------------------------
<S> <C> <C>
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-117
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class C
------------------------------------------------------- Class B -----------
January 22, ---------------------------------------------------- August 1,
1990(D) 1994(D)(D)
Year Ended August 31, through Year Ended August 31, through
----------------------------------------- August 31, ---------------------------------------------------- August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period.. $12.17 $ 11.50 $ 10.94 $10.44 $ 10.70 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74 $ 11.41
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Income
from
investment
operations
Net
investment
income... .67 .68 .69 .70 .41 .61 .63 .64 .65 .65 .04
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions.. (.73) .67 .56 .50 (.26) (.74) .68 .55 .50 (.30) (.05)
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Total
from
invest-
ment
oper-
ations.. (.06) 1.35 1.25 1.20 .15 (.13) 1.31 1.19 1.15 .35 (.01)
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Less
distributions
Dividends
from
net
investment
income.. (.67) (.68) (.69) (.70) (.41) (.61) (.63) (.64) (.65) (.65) (.04)
Distributions
from net
realized
gains.. (.07) -- -- -- -- (.07) -- -- -- -- --
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Total
distri-
butions.. (.74) (.68) (.69) (.70) (.41) (.68) (.63) (.64) (.65) (.65) (.04)
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Net
asset
value,
end
of
period. $11.37 $ 12.17 $ 11.50 $10.94 $ 10.44 $ 11.36 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $ 11.36
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
TOTAL
RETURN#:. (.58)% 12.10% 11.76% 11.81% 1.41% (1.15)% 11.77% 11.23% 11.38% 3.40% (0.27)%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000).. $2,293 $ 2,325 $ 903 $ 665 $ 257 $55,420 $ 61,121 $ 53,449 $ 49,641 $ 50,575 $ 216@
Average
net
assets
(000).. $2,578 $ 1,336 $ 770 $ 344 $ 127 $59,544 $ 55,965 $ 50,607 $ 49,083 $ 52,974 $ 15
Ratios
to
average
net
assets:##
Expenses,
including
distri-
bution
fees... .87% .95% .99% 1.05% 1.04%* 1.27% 1.35% 1.39% 1.45% 1.37% 1.57%*
Expenses,
excluding
distri-
bution
fees... .77% .85% .89% .95% .95%* .77% .85% .89% .95% .90% .82%*
Net
investment
income... 5.60% 5.79% 6.14% 6.53% 6.60%* 5.20% 5.39% 5.74% 6.13% 6.21% 5.06%*
Portfolio
turnover... 33% 56% 32% 34% 33% 33% 56% 32% 34% 33% 33%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on
the first day and a sale on the last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not annualized.
## Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares are not
necessarily comparable to that of Class A or B shares and are not necessarily indicative of future ratios.
@ Figures are actual and not rounded to the nearest thousand.
</TABLE>
See Notes to Financial Statements.
B-118
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Massachusetts Series, including the portfolio
of investments, as of August 31, 1994, 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, 1994 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, Massachusetts Series, as of August 31, 1994, 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 17, 1994
B-119
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MASSACHUSETTS MONEY MARKET SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--101.9%
Boston Wtr. & Swr. Comn.,
F.R.W.D.,
VMIG1 $ 300 2.95%, 9/7/94, Ser.
85A.................... $ 300,000
Chicopee Mass., B.A.N.,
NR 1,200 4.25%, 8/1/95............ 1,203,690
Mass. Bay Trans. Auth.,
S.E.M.O.T.,
VMIG1 2,000 3.75%, 3/1/95, Ser.
84A.................... 2,000,000
T.E.C.P.,
P-1 1,000 3.10%, 10/20/94, Ser.
A...................... 1,000,000
Mass. Comnwlth., Gen.
Oblig., F.R.W.D.,
VMIG1 1,000 3.15%, 9/7/94, Ser.
92A.................... 1,000,000
Mass. Hlth. & Edl. Facs.
Auth. Rev.,
Cap. Asset Prog.,
3.05%, 9/1/94, F.R.D.D.,
VMIG1 100 Ser. 85C................. 100,000
VMIG1 2,000 3.05%, 9/7/94, F.R.W.D.,
Ser. D................. 2,000,000
Childrens Hosp. Proj.,
F.R.W.D.,
NR 1,300 2.75%, 9/7/94, Ser.
94F.................... 1,300,000
Harvard Univ., F.R.W.D.,
VMIG1 2,850 3.00%, 9/1/94, Ser.
85I.................... 2,850,000
Mass. Gen. Hosp.,
Aaa 1,650(D) 7.75%, 1/1/95, Ser. D.... 1,710,061
Tufts Univ., T.E.C.P.,
VMIG1 1,600 3.10%, 9/15/94, Ser.
89E.................... 1,600,000
Wellesley Coll.,
F.R.W.D.,
VMIG1 1,300 2.70%, 9/7/94, Ser. E.... 1,300,000
Mass. Hsg. Fin. Agcy.,
Sngl. Fam. Hsg. Rev.,
Q.T.R.O.T.,
Aaa 2,050 3.60%, 12/1/94, Ser. 5... 2,050,000
Mass. Ind. Fin. Agcy.
Ind. Rev.,
Cabot Newburyport Ltd.,
F.R.W.D.,
P1 995 3.10%, 9/1/94, Ser. 94... 995,000
Holyoke Wtr. Pwr. Co.,
F.R.W.D.,
VMIG1 1,700 2.75%, 9/7/94, Ser.
92A.................... 1,700,000
New England Deaconess,
F.R.W.D.,
VMIG1 $ 1,500 2.95%, 9/7/94, Ser.
93B.................... $ 1,500,000
Ocean Spray Cranberry,
A.N.N.O.T.,
NR 1,180 3.00%, 10/15/94.......... 1,180,000
Residential Dev. Bds.,
F.N.M.A.,
Aaa 1,495 3.70%, 11/15/94, Ser.
E...................... 1,497,858
Showa Womens Inst. Inc.,
F.R.D.D.,
VMIG1 1,000 3.20%, 9/1/94, Ser. 94... 1,000,000
United Med. Corp.,
F.R.W.D.,
P1 900 3.10%, 9/7/94, Ser. 92... 900,000
Mass. Ind. Fin. Agcy.
Poll. Ctrl. Rev.,
New England Pwr. Co.,
T.E.C.P.,
VMIG1 2,000 3.15%, 10/27/94, Ser.
92B.................... 2,000,000
Mass. Ind. Fin. Agcy.
Res. Rec. Rev.,
Ogden Haverhill Proj.,
F.R.W.D.,
VMIG1 1,800 2.90%, 9/7/94, Ser.
92A.................... 1,800,000
Middleborough Mass., Gen.
Oblig.,
Aaa 415 5.00%, 4/15/95, Ser.
94..................... 418,754
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
2.90%, 9/7/94, Ser. 85,
VMIG1 100 F.R.W.D.,................ 100,000
Puerto Rico Hwy. & Trans.
Auth Rev., F.R.W.D.,
VMIG1 1,500 2.65%, 9/7/94............ 1,500,000
Puerto Rico Ind.
Med. & Environ. Facs.,
Ana G. Mendez Ed. Fndtn.,
F.R.W.D.,
A-1* 1,500 2.90%, 9/7/94, Ser. 85... 1,500,000
Reynolds Metal Co. Proj.,
A.N.N.O.T.,
P1 1,000 4.00%, 9/1/95, Ser. 83
A...................... 1,000,000
</TABLE>
B-120 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Puerto Rico Ind. Med. &
Environ. Facs.,
Schering-Plough Corp.,
A.N.N.O.T.,
AAA* $ 500 2.80%, 12/1/94, Ser.
83A.................... $ 500,000
Revere Hsg. Auth.,
Multifamily Mtge. Rev.,
Waters Edge Prog.,
F.R.W.D.,
A-1* 1,990 3.25%, 9/2/94, Ser.
91C.................... 1,990,000
-----------
Total Investments--101.9%
(amortized
cost--$37,995,363**)... 37,995,363
Liabilities in excess of
other assets--(1.9%)... (717,259)
-----------
Net Assets--100%......... $37,278,104
-----------
-----------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.O.T.--Annual Optional Tender
B.A.N.--Bond Anticipation Note #.
F.N.M.A.--Federal National Mortgage Association
F.R.D.D.--Floating Rate (Daily) Demand Note #
F.R.W.D.--Floating Rate (Weekly) Demand Note #
Q.T.R.O.T.--Quarterly Tax & Revenue Optional Tender
S.E.M.O.T.--Semi-Monthly Tender
T.E.C.P.--Tax-Exempt Commercial Paper
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax
purposes is substantially the same as for financial
reporting purposes.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
The Fund's current Statement of Additional Information
contains a description of Moody's and Standard & Poor's
ratings.
B-121 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1994
-----------
<S> <C>
Investments, at amortized cost which approximates market value............................. $37,995,363
Cash....................................................................................... 180,083
Receivable for investments sold............................................................ 3,314,237
Receivable for Fund shares sold............................................................ 331,090
Interest receivable........................................................................ 188,432
Deferred expenses and other assets......................................................... 23,956
-----------
Total assets........................................................................... 42,033,161
-----------
Liabilities
Payable for investments purchased.......................................................... 4,067,681
Payable for Fund shares reacquired......................................................... 620,771
Accrued expenses and other liabilities..................................................... 40,459
Dividends payable.......................................................................... 14,263
Distribution fee payable................................................................... 6,637
Due to Manager............................................................................. 4,236
Deferred Trustees' fees.................................................................... 1,010
-----------
Total liabilities...................................................................... 4,755,057
-----------
Net Assets................................................................................. $37,278,104
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value......................................... $ 372,781
Paid-in capital in excess of par......................................................... 36,905,323
-----------
Net assets, August 31, 1994.............................................................. $37,278,104
-----------
-----------
Net asset value, offering price and redemption price per share ($37,278,104 / 37,278,104
shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)..... $1.00
</TABLE>
See Notes to Financial Statements.
B-122
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
----------
<S> <C>
Income
Interest............................. $1,052,125
----------
Expenses
Management fee, net of waiver of
$167,335............................. 44,800
Distribution fee..................... 53,034
Custodian's fees and expenses........ 58,000
Transfer agent's fees and expenses... 27,000
Reports to shareholders.............. 24,000
Registration fees.................... 20,000
Legal fees........................... 15,000
Amortization of organization
expenses............................. 12,151
Audit fee............................ 10,000
Trustees' fees....................... 3,375
Miscellaneous........................ 2,825
----------
Total expenses..................... 270,185
Less: expense subsidy (Note 4)..... (7,121)
----------
Net expenses....................... 263,064
----------
Net investment income.................. 789,061
----------
Net Increase in Net Assets
Resulting from Operations.............. $ 789,061
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) -----------------------------
in Net Assets 1994 1993
------------- ------------
<S> <C> <C>
Operations
Net investment
income................. $ 789,061 $ 679,277
Net realized gain on
investment
transactions......... -- 369
------------- ------------
Net increase in net
assets
resulting from
operations........... 789,061 679,646
------------- ------------
Dividends and
distributions to
shareholders (Note
1)..................... (789,061) (679,646)
------------- ------------
Series share transactions
(at $1 per share)
Net proceeds from
shares
subscribed........... 147,907,523 139,607,603
Net asset value of
shares
issued to
shareholders in
reinvestment of
dividends and
distributions........ 757,067 638,146
Cost of shares
reacquired............. (147,994,192) (121,656,791)
------------- ------------
Net increase in net
assets
from Series share
transactions......... 670,398 18,588,958
------------- ------------
Total increase........... 670,398 18,588,958
Net Assets
Beginning of year........ 36,607,706 18,018,748
------------- ------------
End of year.............. $ 37,278,104 $ 36,607,706
------------- ------------
------------- ------------
</TABLE>
See Notes to Financial Statements.
B-123
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $51,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses except as set forth in Note 4.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. PMF
voluntarily waived its entire management fee until October 31, 1993. Effective
November 1, 1993, PMF reduced the management fee waiver to 75%. The amount of
fees waived for the fiscal year ended August 31, 1994 amounted to $167,335
($.004 per share; .39% 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-124
<PAGE>
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$23,200 for the services of PMFS. As of August 31, 1994, approximately $2,000 of
such fees were due to PMFS.
Note 4. Expense PMF voluntarily subsidized
Subsidy 25% of the operating
expenses of the Series (other than management and
distribution fees) through October 31, 1993. Effective November 1, 1993, PMF
eliminated the expense subsidy. For the fiscal year ended August 31, 1994, PMF
subsidized $7,121 ($.0002 per share; .02% of average net assets) of the Series'
expenses. The Series is not required to reimburse PMF for such expense subsidy.
B-125
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
August 5, 1991*
Year Ended August 31, through
------------------------------------ August 31,
1994 1993 1992 1991
------------ ------- ------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains(D).......................... .019 .021 .034 .003
Dividends and distributions to shareholders.......................... (.019) (.021) (.034) (.003)
------------ ------- ------- ------
Net asset value, end of period....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ ------- ------- ------
------------ ------- ------- ------
TOTAL RETURN#:....................................................... 1.89% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...................................... $ 37,278 $36,608 $18,019 $ 6,365
Average net assets (000)............................................. $ 42,427 $32,246 $15,477 $ 3,200
Ratio to average net assets:(D)
Expenses, including distribution fee............................... .620% .365% .125% .125%**
Expenses, excluding distribution fee............................... .495% .240% .00% .00%**
Net investment income.............................................. 1.86% 2.11% 3.20% 4.46%**
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of management fee waiver and expense subsidy.
# Total returns for periods of less than a full year are not annualized.
See Notes to Financial Statements.
B-126
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Massachusetts Money Market Series, including
the portfolio of investments, as of August 31, 1994, 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
three 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, 1994 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, 1994, 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 17, 1994
B-127
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MICHIGAN SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--98.0%
Bay De Noc Comm. Coll.
Dist.,
4.60%, 5/1/13,
Aaa $ 575 M.B.I.A............... $ 475,146
Breitung Twnshp. Sch.
Dist. Rev.,
Gen. Oblig.,
6.30%, 5/1/15,
Aaa 250 M.B.I.A............... 253,580
Canton Charter Twnshp.
Bldg. Auth.,
Wayne Cnty. Golf
Course,
Aaa 450 4.75%, 1/1/11, F.S.A.... 387,693
Aaa 450 4.75%, 1/1/12, F.S.A.... 382,086
Aaa 500 4.75%, 1/1/13, F.S.A.... 421,200
Aaa 500 4.75%, 1/1/14, F.S.A.... 417,450
Central Michigan Univ.
Rev.,
A 700(D) 7.00%, 10/1/10.......... 784,154
Chippewa Valley Sch.
Dist.,
5.00%, 5/1/21,
Aaa 2,400 F.G.I.C............... 2,015,496
Clinton Twnshp. Bldg.
Auth.,
Macomb Cnty.,
4.75%, 11/1/10,
Aaa 2,810 A.M.B.A.C............. 2,423,288
Coldwater Wtr. Supply &
Wastewater Sys. Rev.,
6.125%, 7/1/15,
Aaa 445 A.M.B.A.C............. 446,624
Detroit Econ. Dev.
Corp.,
Res. Rec. Rev.,
6.875%, 5/1/09, Ser. A,
Aaa 1,000 F.S.A................. 1,049,400
Detroit Sewage Disp.
Rev.,
5.70%, 7/1/23,
Aaa 2,000 F.G.I.C............... 1,861,220
Detroit St. Aid, Gen.
Oblig.,
Baa 1,500 5.625%, 5/1/97.......... 1,511,850
Detroit Wtr. Supply Sys.
Rev.,
6.50%, 7/1/15,
Aaa 1,000 F.G.I.C............... 1,051,560
7.25%, 7/1/20,
Aaa 1,000(D) F.G.I.C............... 1,128,070
Ferris St. Univ. Gen.
Rev.,
5.80%, 10/1/05,
Aaa 440 A.M.B.A.C............. 449,715
Grand Rapids San. Swr. Sys. Rev.,
A1 500 7.00%, 1/1/16........... 535,210
Grand Rapids Wtr. Supply
Sys. Rev.,
7.05%, 1/1/05,
Aaa 515(D) F.G.I.C............... 572,525
Aaa 2,100(D) 7.875%, 1/1/18.......... 2,335,137
Holland Sch. Dist.,
A.M.B.A.C.,
Aaa $ 2,400 Zero Coupon, 5/1/15..... $ 654,072
Huron Valley Sch. Dist.,
Gen. Oblig.,
Zero Coupon, 5/1/10,
Aaa 3,500 F.G.I.C............... 1,330,455
Kent Hosp. Fac. Fin.
Auth. Rev.,
Blodgette Mem. Med.
Ctr.,
A 500 7.25%, 7/1/05, Ser. A... 535,295
Butterworth Hosp.,
7.25%, 1/15/12, Ser.
Aaa 500(D) A..................... 559,555
Michigan Higher Ed.,
Student
Loan Auth. Rev.,
M.B.I.A.,
7.55%, 10/1/08, Ser.
Aaa 500 XIII-A................ 538,515
Michigan Mun. Bond Auth.
Rev.,
Local Gov't. Loan
Prog.,
AAA* 500(D) 7.80%, 5/1/13........... 565,005
Michigan Pub. Pwr. Agcy.
Rev.,
Belle River Proj.,
A1 1,250 5.25%, 1/1/18, Ser. A... 1,085,050
Michigan St. Comp.
Trans. Rev.,
5.875%, 5/15/05, Ser.
A1 1,250 B..................... 1,287,612
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr.,
Baa1 2,000 8.25%, 7/1/12, Ser. A... 2,160,480
McLaren Obligated Group,
7.50%, 9/15/21, Ser.
Aaa 800(D) A..................... 924,576
Oakwood Hosp. Obligated Group,
6.95%, 7/1/02,
Aaa 1,000(D)@ F.G.I.C............... 1,113,590
Sisters of Mercy,
M.B.I.A.,
7.50%, 8/15/07, Ser.
Aaa 2,000 H..................... 2,191,640
Michigan St. Hsg. Dev. Auth. Rev.,
Multifamily Mtge. Insured Hsg.,
A+* 1,000 7.15%, 4/1/10, Ser. A... 1,033,520
8.875%, 7/1/17, Ser. A,
Aaa 1,000@@ F.G.I.C............... 1,052,360
A* 500 7.70%, 4/1/23, Ser. A... 520,615
Sngl. Fam. Mtge.,
7.70%, 12/1/16, Ser.
AA* 445 A..................... 462,907
</TABLE>
B-128 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
Michigan St. Strategic
Fund Ltd. Obligated
Rev., Waste Mgmt. Inc.
Proj.,
A1 $ 2,000 6.625%, 12/1/12......... $ 2,022,680
Michigan St. Trunk Line
Hwy.,
7.00%, 8/15/17, Ser.
AAA* 2,000(D) A..................... 2,214,200
Ser. A, A.M.B.A.C.,
Aaa 2,600 Zero Coupon, 10/1/05.... 1,391,572
Aaa 1,250 Zero Coupon, 10/1/06.... 622,750
Monroe Cnty. Poll. Ctrl.
Rev.,
Detroit Edison Co.,
10.50%, 12/1/16, Ser.
Baa1 1,500 A..................... 1,653,270
7.65%, 9/1/20,
Aaa 2,000 F.G.I.C............... 2,213,600
Mt. Pleasant Wtr. Rev.,
Wtr. & Swr., M.B.I.A.,
Aaa 485 6.00%, 2/1/21........... 476,149
Aaa 520 5.00%, 2/1/22........... 435,807
Aaa 550 4.00%, 2/1/23........... 383,630
Aaa 585 4.00%, 2/1/24........... 405,844
Oak Park, Gen. Oblig.,
7.00%, 5/1/11,
Aaa 375(D) A.M.B.A.C............. 421,751
7.00%, 5/1/12,
Aaa 400(D) A.M.B.A.C............. 449,868
Oakland Cnty., City of Lathrup,
Evergreen Farmington Swr. Rev.,
A 600 6.00%, 11/1/08.......... 607,170
A 700 6.00%, 11/1/09.......... 701,120
Oakland Cnty., Leuders
Drainage Dept.,
5.50%, 5/1/09,
Aaa 350 A.M.B.A.C............. 337,684
Ottawa Cnty., Gen. Oblig.,
Northwest Ottawa Wtr. Supply,
A1 415 6.25%, 10/1/08.......... 423,794
Wtr. Supply Sys.,
NR 1,045(D) 7.60%, 8/1/07........... 1,125,998
Pinckney Comm. Sch.,
Livingston & Washtenaw
Cntys.,
5.00%, 5/1/14,
Aaa 1,250 F.G.I.C............... 1,080,750
Puerto Rico Elec. Pwr.
Auth. Rev.,
7.125%, 7/1/14, Ser.
Baa1 1,580(D) N..................... 1,756,913
7.125%, 7/1/14, Ser.
Baa1 920 N..................... 983,112
Puerto Rico Commonwlth.
Hwy. Auth. Rev.,
Baa1 $ 1,000 6.75%, 7/1/05, Ser. R... $ 1,088,150
Baa1 1,500(D)@ 7.75%, 7/1/16, Ser. Q... 1,738,755
Puerto Rico Pub. Bldgs.
Auth.,
Gtd. Pub. Ed. & Hlth.
Facs.,
Baa1 625(D) 8.00%, 7/1/12, Ser. F... 681,119
6.875%, 7/1/21, Ser.
Aaa 1,325(D)@ L..................... 1,490,399
Pub. Ed. & Hlth. Facs.,
7.875%, 7/1/16, Ser.
Aaa 990(D) H..................... 1,095,871
Puerto Rico, Gen.
Oblig.,
8.34%, 7/1/08, Ser. A,
Aaa 1,000(D)(D) M.B.I.A............... 1,012,500
Saginaw Valley St. Univ. Gen. Rev.,
5.375%, 7/1/16,
Aaa 790 M.B.I.A............... 717,778
Saline Area Sch. Dist.,
5.00%, 5/1/04, Ser. 1,
Aaa 700 M.B.I.A............... 680,344
Tri-Cnty. Area Schs., Gen. Oblig.,
5.25%, 5/1/20,
Aaa 2,000 F.G.I.C............... 1,750,360
Univ. of Michigan Major
Cap. Proj. Rev.,
Aa1 355 5.50%, 4/1/13........... 328,148
Univ. of Michigan Rev.,
5.50%, 8/15/22, Ser.
A1 640 A..................... 569,990
Pkg. Sys. Rfdg.,
Aa 500 5.00%, 6/1/15........... 427,320
Virgin Islands Pub. Fin. Auth. Rev.,
Matching Loan Notes,
7.25%, 10/1/18, Ser.
NR 500 A..................... 515,810
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser. A... 522,300
Wtr. Sys. Rev.,
NR 500 8.50%, 1/1/10, Ser. A... 549,280
Wayne Cnty. Arpt. Rev.,
6.125%, 12/1/24,
Aaa 500 M.B.I.A............... 488,830
Wayne Cnty. Bldg. Auth.,
Baa 1,250(D) 8.00%, 3/1/17, Ser. A... 1,466,725
Western Michigan Univ. Gen. Rev.,
5.00%, 7/15/21,
Aaa 500 F.G.I.C............... 417,955
</TABLE>
B-129 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
Wixom, Gen. Oblig.,
6.00%, 4/1/07,
Aaa $ 475 A.M.B.A.C............. $ 486,785
6.00%, 4/1/08,
Aaa 475 A.M.B.A.C............. 482,918
6.00%, 4/1/09,
Aaa 500 A.M.B.A.C............. 503,840
Wyandotte Elec. Rev.,
6.25%, 10/1/08,
Aaa 2,000 M.B.I.A............... 2,089,580
-----------
Total Investments--98.0%
(cost $70,069,806; Note
4).................... 73,329,070
Other assets in excess
of
liabilities--2.0%..... 1,489,587
-----------
Net Assets--100%........ $74,818,657
-----------
-----------
</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.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
* Standard & Poor's rating.
(D) Prerefunded issues are secured by escrowed cash
and/or
direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
@ Pledged as initial margin on financial futures
contracts.
@@ $600,000 par 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.
B-130 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $70,069,806)................................................. $73,329,070
Cash..................................................................................... 260,847
Interest receivable...................................................................... 1,113,789
Receivable for investments sold.......................................................... 515,000
Receivable for Fund shares sold.......................................................... 166,692
Other assets............................................................................. 1,963
---------------
Total assets........................................................................... 75,387,361
---------------
Liabilities
Payable for Fund shares reacquired....................................................... 369,954
Accrued expenses......................................................................... 72,343
Dividends payable........................................................................ 54,835
Management fee payable................................................................... 31,648
Distribution fee payable................................................................. 30,065
Due to broker-variation margin payable................................................... 8,849
Deferred trustee fees.................................................................... 1,010
---------------
Total liabilities...................................................................... 568,704
---------------
Net Assets............................................................................... $74,818,657
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 63,681
Paid-in capital in excess of par....................................................... 71,608,322
---------------
71,672,003
Distributions in excess of net realized gains.......................................... (56,985)
Net unrealized appreciation of investments............................................. 3,203,639
---------------
Net assets, August 31, 1994............................................................ $74,818,657
---------------
---------------
Class A:
Net asset value and redemption price per share ($4,706,290 / 400,422 shares of
beneficial
interest issued and outstanding)..................................................... $11.75
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $12.11
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share ($70,112,167 / 5,967,688
shares of beneficial interest issued and outstanding)................................ $11.75
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share ($199.71 / 17 shares of
beneficial
interest issued and outstanding)..................................................... $11.75
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-131
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
----------
<S> <C>
Income
Interest............................. $4,738,679
----------
Expenses
Management fee....................... 383,005
Distribution fee--Class A............ 4,506
Distribution fee--Class B............ 360,476
Custodian's fees and expenses........ 87,000
Transfer agent's fees and expenses... 63,000
Registration fees.................... 31,500
Reports to shareholders.............. 23,000
Legal fees........................... 15,000
Audit fee............................ 10,500
Trustees' fees....................... 3,375
Miscellaneous........................ 5,006
----------
Total expenses..................... 986,368
----------
Net investment income.................. 3,752,311
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.............. 307,651
Financial futures contract
transactions......................... 147,685
----------
455,336
----------
Net change in unrealized
appreciation/depreciation of:
Investments.......................... (4,881,251)
Financial futures contracts.......... (36,562)
----------
(4,917,813)
----------
Net loss on investments................ (4,462,477)
----------
Net Decrease in Net Assets
Resulting from Operations.............. $ (710,166)
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) --------------------------
in Net Assets 1994 1993
----------- -----------
<S> <C> <C>
Operations
Net investment income.... $ 3,752,311 $ 3,273,879
Net realized gain on
investment
transactions........... 455,336 72,559
Net change in unrealized
appreciation/depreciation
of investments......... (4,917,813) 3,763,379
----------- -----------
Net increase (decrease)
in net assets resulting
from operations........ (710,166) 7,109,817
----------- -----------
Dividends and distributions (Note 1):
Dividends from net
investment income
Class A................ (237,966) (125,767)
Class B................ (3,514,345) (3,148,112)
----------- -----------
(3,752,311) (3,273,879)
----------- -----------
Distributions from net
realized gains
Class A................ (25,697) (15,062)
Class B................ (429,245) (460,116)
----------- -----------
(454,942) (475,178)
----------- -----------
Series share transactions
(Note 5):
Net proceeds from shares
sold................... 13,225,456 16,968,562
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 2,730,066 2,426,469
Cost of shares
reacquired............... (10,334,965) (6,352,793)
----------- -----------
Net increase in net
assets from Series
share transactions..... 5,620,557 13,042,238
----------- -----------
Total increase............. 703,138 16,402,998
Net Assets
Beginning of year.......... 74,115,519 57,712,521
----------- -----------
End of year................ $74,818,657 $74,115,519
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements.
B-132
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging it's existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this
B-133
<PAGE>
agreement, PMF has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PMF has entered into a
subadvisory agreement with The Prudential Investment Corporation (``PIC''). PIC
furnishes investment advisory services in connection with the management of the
Fund. PMF pays for the services of PIC, the cost of compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $47,900 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $95,800 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 Prudential Mutual Fund Ser-
Transactions with vices, Inc. (``PMFS''), a
Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the fiscal year ended August 31, 1994, the Series incurred fees of approximately
$40,500 for the services of PMFS. As of August 31, 1994, approximately $3,300 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the fiscal
year ended August 31, 1994 were $14,305,165 and $9,274,453, respectively.
At August 31, 1994, the Fund sold 45 financial futures contracts on the
Municipal Bond Index which expire in September, 1994. The value at disposition
of such contracts is $4,611,719. The value of such contracts on August 31, 1994
was $4,667,344, thereby resulting in an unrealized loss of $55,625.
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, 1994, net unrealized appreciation for federal income tax purposes
was $3,259,264 (gross unrealized appreciation--$4,534,256; gross unrealized
depreciation--$1,274,992).
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 commencing in or about February 1995.
B-134
<PAGE>
The Fund has authorized an unlimited number of shares of beneficial interest
of each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- --------- -----------
<S> <C> <C>
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
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold...................... 184,780 $ 2,261,702
Shares issued in reinvestment of
dividends and distributions.... 7,339 88,939
Shares reacquired................ (23,307) (285,030)
--------- -----------
Net increase in shares
outstanding.................... 168,812 $ 2,065,611
--------- -----------
--------- -----------
Year ended August 31, 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
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold..................... 1,212,261 $14,706,860
Shares issued in reinvestment of
dividends and distributions... 193,681 2,337,530
Shares reacquired............... (501,158) (6,067,763)
--------- -----------
Net increase in shares
outstanding................... 904,784 $10,976,627
--------- -----------
--------- -----------
Class C
- --------------------------------
August 1, 1994* through
August 31, 1994:
Shares sold..................... 17 $ 200
--------- -----------
Net increase in shares
outstanding................... 17 $ 200
--------- -----------
--------- -----------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-135
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------- --------------------------------
January 22,
1990(D)
Year Ended August 31, through Year Ended August 31,
PER SHARE OPERATING ----------------------------------------- August 31, --------------------------------
PERFORMANCE: 1994 1993 1992 1991 1990 1994 1993 1992
------------ ------ ------ ------ ----------- ------------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period...................... $12.51 $11.90 $11.30 $10.81 $ 11.02 $ 12.51 $ 11.90 $ 11.30
------ ------ ------ ------ ----------- ------------ ------- -------
Income from investment
operations
Net investment income......... .64 .67 .68 .67 .41 .59 .62 .63
Net realized and unrealized
gain (loss) on investment
transactions................ (.69) .71 .60 .49 (.21) (.69) .71 .60
------ ------ ------ ------ ----------- ------------ ------- -------
Total from investment
operations................ (.05) 1.38 1.28 1.16 .20 (.10) 1.33 1.23
------ ------ ------ ------ ----------- ------------ ------- -------
Less distributions
Dividends from net investment
income...................... (.64) (.67) (.68) (.67) (.41) (.59) (.62) (.63)
Distributions from net
realized gains.............. (.07) (.10) -- -- -- (.07) (.10) --
------ ------ ------ ------ ----------- ------------ ------- -------
Total distributions......... (.71) (.77) (.68) (.67) (.41) (.66) (.72) (.63)
------ ------ ------ ------ ----------- ------------ ------- -------
Net asset value, end of
period...................... $11.75 $12.51 $11.90 $11.30 $ 10.81 $ 11.75 $ 12.51 $ 11.90
------ ------ ------ ------ ----------- ------------ ------- -------
------ ------ ------ ------ ----------- ------------ ------- -------
TOTAL RETURN#:................ (0.38)% 11.95% 11.63% 11.04% 1.82% (0.78)% 11.51% 11.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $4,706 $3,814 $1,618 $ 835 $ 501 $ 70,112 $70,302 $56,095
Average net assets (000)...... $4,505 $2,285 $1,235 $ 694 $ 365 $ 72,095 $61,548 $52,137
Ratios to average net assets:##
Expenses, including
distribution fees......... .91% .96%@ .98% 1.09% 1.09%* 1.31% 1.36%@ 1.38%
Expenses, excluding
distribution fees......... .81% .86%@ .88% .99% .99%* .81% .86%@ .88%
Net investment income....... 5.27% 5.51%@ 5.82% 6.09% 6.25%* 4.87% 5.11%@ 5.42%
Portfolio turnover............ 12% 14% 30% 62% 55% 12% 14% 30%
</TABLE>
<TABLE>
<CAPTION>
Class C
----------
August 1,
1994(D)(D)
through
PER SHARE OPERATING August 31,
PERFORMANCE: 1991 1990 1994
------- ------- ----------
<S> <C> <C> <C>
Net asset value, beginning of
period...................... $ 10.81 $ 11.03 $ 11.78
------- ------- ----------
Income from investment
operations
Net investment income......... .63 .65 .04
Net realized and unrealized
gain (loss) on investment
transactions................ .49 (.22) (.03)
------- ------- ----------
Total from investment
operations................ 1.12 .43 .01
------- ------- ----------
Less distributions
Dividends from net investment
income...................... (.63) (.65) (.04)
Distributions from net
realized gains.............. -- -- --
------- ------- ----------
Total distributions......... (.63) (.65) (.04)
------- ------- ----------
Net asset value, end of
period...................... $ 11.30 $ 10.81 $ 11.75
------- ------- ----------
------- ------- ----------
TOTAL RETURN#:................ 10.60% 4.02% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $59,400 $49,923 $ 200@@
Average net assets (000)...... $50,809 $48,694 $ 199@@
Ratios to average net assets:##
Expenses, including
distribution fees......... 1.49% 1.44% 2.15%*
Expenses, excluding
distribution fees......... .99% .97% 1.39%*
Net investment income....... 5.66% 5.95% 4.56%*
Portfolio turnover............ 62% 55% 12%
</TABLE>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
## Because of the event referred to in (D)(D) and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that of Class A
or B shares and are not necessarily indicative of future ratios.
@ Restated.
@@ Figures are actual and not rounded to the nearest thousand.
See Notes to Financial Statements.
B-136
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Michigan Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Michigan Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Michigan Series, as of August 31, 1994, 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 17, 1994
B-137
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
MINNESOTA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.8%
Braham Indpt. Sch. Dist., No. 314,
AA* $ 425 5.20%, 2/1/13.......... $ 386,066
Breckenridge Hosp. Facs. Rev.,
Franciscan Sisters Healthcare,
NR 800(D) 9.375%, 9/1/17, Ser.
B1................... 918,648
Dakota Cnty. Hsg. & Redev. Auth.,
Burnsville & Inner Grove,
Sngl. Fam. Mtge.,
Aaa 10 9.375%, 5/1/18,
F.G.I.C.............. 10,423
Metropolitan Council of Minneapolis,
Hubert H. Humphrey Metrodome,
A 500 6.00%, 10/1/09......... 505,240
St. Paul Met. Area,
Aaa 750 6.25%, 12/1/06, Ser.
A.................... 784,545
Aaa 500 6.75%, 9/1/10, Ser.
D.................... 527,135
Minneapolis Cmnty. Dev.
Agcy.,
St. Paul Hsg. &
Redev.
Auth. Rev.,
Aa 10 9.875%, 12/1/15........ 10,371
Tax Increment Rev., M.B.I.A.,
Aaa 750 Zero Coupon, 9/1/01.... 527,543
Aaa 1,000 Zero Coupon, 3/1/06.... 534,620
Aaa 1,000 Zero Coupon, 9/1/07.... 487,720
Minneapolis Hosp. Rev.,
Lifespan Inc., Ser.
B,
Aaa 820(D) 8.70%, 12/1/02......... 933,660
A 800 8.125%, 8/1/17......... 877,952
Minneapolis-St. Paul Hsg. & Redev.
Auth., Hlth. Care Sys. Rev.,
4.75%, 11/15/18, Ser.
Aaa 1,500 A, A.M.B.A.C......... 1,201,200
Minneapolis-St. Paul
Hsg. Fin. Brd. Rev.,
Sngl. Fam. Mtge.,
AAA* 1,000 7.30%, 8/1/31,
G.N.M.A.............. 1,045,850
Minneapolis-St. Paul Met. Arpts.,
Aaa 1,000 7.80%, 1/1/14, Ser.
7.................... 1,114,790
Minnesota Pub. Facs.
Auth., Wtr. Poll.
Ctrl. Rev.,
AA+* $ 500 6.90%, 3/1/03, Ser.
A.................... $ 548,245
AA+* 650 7.00%, 3/1/09.......... 695,630
Minnesota St. Higher
Ed. Facs. Auth. Rev.,
Macalester Coll.,
AA-* 500 6.40%, 3/1/22.......... 511,330
St. Marys Coll.,
Baa 625 6.10%, 10/1/16......... 617,487
Univ. of St. Thomas,
A1 300 5.60%, 9/1/14.......... 282,468
Northern Mun. Pwr.
Agcy., Elec. Sys.
Rev.,
A 370 7.25%, 1/1/16, Ser.
A.................... 401,221
5.50%, 1/1/18, Ser. B,
Aaa 750 A.M.B.A.C............ 698,715
Northfield Coll. Fac.
Rev.,
St. Olaf Coll.,
A 370 6.30%, 10/1/12......... 377,999
Ramsey Cnty., Gen.
Oblig.,
Aaa 500 7.25%, 2/1/04.......... 537,825
Red. Wing Indpt. Sch.
Dist.,
No. 256 Sch. Bldg.,
Aa 500 5.60%, 2/1/09.......... 488,385
Robbinsdale Hosp. Rev.,
North Memorial Med.
Ctr.,
Aaa 1,000 5.55%, 5/15/19,
A.M.B.A.C............ 914,720
Rochester Hlth. Care
Facs. Rev., Mayo Med.
Ctr.,
NR 500(D) 8.30%, 11/15/07, Ser.
A.................... 575,985
Science Museum,
St. Paul, Cert. of
Part.,
AAA* 1,280(D) 7.50%, 12/15/01........ 1,369,462
Southern Mun. Pwr.
Agcy., Pwr. Supply
Sys. Rev., Ser. B,
Aaa 500 5.50%, 1/1/15,
A.M.B.A.C............ 468,580
</TABLE>
B-138 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<C> <C> <S> <C>
St. Louis Park Hosp.
Rev., Methodist
Hosp., Ser. C,
Aaa $ 500 5.20%, 7/1/16,
A.M.B.A.C............ $ 438,945
Aaa 1,400(D)/@ 7.25%, 7/1/18,
A.M.B.A.C............ 1,577,016
St. Paul Hsg. & Redev.
Auth., Ramsey Med.
Ctr. Proj.,
Aaa 500 5.55%, 5/15/23,
A.M.B.A.C............ 451,675
Tax Increment Rev.,
Aaa 1,000 5.25%, 9/1/05,
A.M.B.A.C............ 982,790
St. Paul Port Auth.,
Energy Park Tax
Increment Rev.,
AAA* 855(D) 8.00%, 12/1/07......... 955,745
Univ. of Minnesota
Rev.,
AAA* 150(D) 9.625%, 2/1/05......... 157,168
Aa 1,000 6.00%, 2/1/11, Ser.
A.................... 1,004,080
Verndale Indpt. Sch. Dist., No. 818,
Sch. Bldg.
AA* 955 4.875%, 2/1/14......... 823,859
Western Mun. Pwr.
Agcy., Supply Rev.,
A1 500 5.50%, 1/1/15, Ser.
A.................... 459,270
-----------
Total Investments--97.8%
(cost $24,115,494; Note
4)................... 25,204,363
Other assets in excess
of
liabilities--2.2%.... 571,627
-----------
Net Assets--100%....... $25,775,990
-----------
-----------
</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.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
@ Pledged as initial margin on financial futures
contracts.
* Standard & Poor's rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-139 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $24,115,494)................................................. $25,204,363
Receivable for investments sold.......................................................... 516,583
Interest receivable...................................................................... 405,302
Other assets............................................................................. 865
Receivable for Series shares sold........................................................ 450
---------------
Total assets........................................................................... 26,127,563
---------------
Liabilities
Bank overdraft........................................................................... 207,293
Payable for Series shares reacquired..................................................... 60,521
Accrued expenses......................................................................... 38,534
Dividends payable........................................................................ 18,294
Management fee payable................................................................... 11,060
Distribution fee payable................................................................. 10,607
Due to broker-variation margin........................................................... 4,254
Deferred trustees' fees.................................................................. 1,010
---------------
Total liabilities...................................................................... 351,573
---------------
Net Assets............................................................................... $25,775,990
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 22,301
Paid-in capital in excess of par....................................................... 24,629,740
---------------
24,652,041
Accumulated net realized gain on investments........................................... 55,767
Net unrealized appreciation on investments............................................. 1,068,182
---------------
Net assets, August 31, 1994............................................................ $25,775,990
---------------
---------------
Class A:
Net asset value and redemption price per share
($1,286,717 / 111,328 shares of beneficial interest issued and outstanding).......... $11.56
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $11.92
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($24,489,074 / 2,118,742 shares of beneficial interest issued and outstanding)....... $11.56
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($198.92 / 17.21 shares of beneficial interest issued and outstanding)............... $11.56
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-140
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................ $ 1,664,193
-----------
Expenses
Management fee...................... 136,463
Distribution fee--Class A........... 1,179
Distribution fee--Class B........... 130,567
Custodian's fees and expenses....... 62,000
Transfer agent's fees and
expenses............................ 34,600
Registration fees................... 27,500
Reports to shareholders............. 26,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Trustees' fees...................... 3,375
Miscellaneous....................... 643
-----------
Total expenses.................... 447,827
-----------
Net investment income................. 1,216,366
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 98,727
Financial futures transactions...... 95,075
-----------
193,802
-----------
Net change in unrealized appreciation/
depreciation on:
Investments......................... (1,783,295)
Financial futures contracts......... (20,250)
-----------
(1,803,545)
-----------
Net gain (loss) on investments........ (1,609,743)
-----------
Net Decrease in Net Assets
Resulting from Operations............. $ (393,377)
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) --------------------------
in Net Assets 1994 1993
----------- -----------
<S> <C> <C>
Operations
Net investment income.... $ 1,216,366 $ 1,238,313
Net realized gain on
investment
transactions........... 193,802 142,719
Net change in unrealized
appreciation on
investments............ (1,803,545) 1,111,143
----------- -----------
Net increase (decrease)
in net
assets resulting from
operations............. (393,377) 2,492,175
----------- -----------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A................ (57,132) (31,491)
Class B................ (1,159,234) (1,206,822)
----------- -----------
(1,216,366) (1,238,313)
----------- -----------
Distributions from net
realized gains
Class A................ (6,669) (992)
Class B................ (189,576) (46,636)
----------- -----------
(196,245) (47,628)
----------- -----------
Series share transactions
(Note 5)
Net proceeds from shares
sold................... 3,930,513 4,761,162
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 949,351 838,823
Cost of shares
reacquired............... (4,757,735) (4,494,663)
----------- -----------
Net increase in net
assets from Series
share transactions..... 122,129 1,105,322
----------- -----------
Total increase
(decrease)............... (1,683,859) 2,311,556
Net Assets
Beginning of year.......... 27,459,849 25,148,293
----------- -----------
End of year................ $25,775,990 $27,459,849
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-141
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Minnesota Series (the ``Series'')
commenced investment operations in October, 1984. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund and the Series in the
preparation of its financial statements.
Securities Valuations: The 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. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-142
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers and employees of the Fund,
and occupancy and certain clerical and bookkeeping costs of the Fund. The Fund
bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $20,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $41,900 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1994, the Series incurred fees of approximately
$22,000 for the services of PMFS. As of August 31, 1994, approximately $2,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994, were $5,579,927 and $5,492,077, respectively.
At August 31, 1994 the Series sold 17 financial futures contracts on the
Municipal Bond Index expiring in September, 1994. The value at disposition of
such contracts was $1,742,531. The value of such contracts on August 31, 1994
was $1,763,218, thereby resulting in an unrealized loss of $20,687.
The cost basis of investments for federal income tax purposes at August 31,
1994 was substantially the same as the basis for financial reporting purposes
and, accordingly, net unrealized appreciation of investments for federal income
tax purposes was $1,088,869 (gross unrealized appreciation--$1,517,166; gross
unrealized depreciation--$428,297).
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
B-143
<PAGE>
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 commencing in or about February 1995.
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 1993 were as follows:
<TABLE>
<S> <C> <C>
Class A Shares Amount
------------- -----------
Year ended August 31, 1994:
Shares sold...................... 57,307 $ 690,269
Shares issued in reinvestment of
dividends and distributions.... 4,480 53,440
Shares reacquired................ (23,024) (272,744)
------------- -----------
Net increase in shares
outstanding.................... 38,763 $ 470,965
------------- -----------
------------- -----------
Year ended August 31, 1993:
Shares sold...................... 40,044 $ 478,217
Shares issued in reinvestment of
dividends and distributions.... 2,253 26,990
Shares reacquired................ (3,877) (46,769)
------------- -----------
Net increase in shares
outstanding.................... 38,420 $ 458,438
------------- -----------
------------- -----------
<CAPTION>
Class B
<S> <C> <C>
Year ended August 31, 1994:
Shares sold...................... 267,959 $ 3,240,044
Shares issued in reinvestment of
dividends and distributions.... 74,796 895,911
Shares reacquired................ (378,895) (4,484,991)
------------- -----------
Net decrease in shares
outstanding.................... (36,140) $ (349,036)
------------- -----------
------------- -----------
Year ended August 31, 1993:
Shares sold...................... 359,576 $ 4,282,945
Shares issued in reinvestment of
dividends and distributions.... 68,005 811,833
Shares reacquired................ (373,090) (4,447,894)
------------- -----------
Net increase in shares
outstanding.................... 54,491 $ 646,884
------------- -----------
------------- -----------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold...................... 17 $ 200
------------- -----------
------------- -----------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-144
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MINNESOTA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class C
---------------------------------------------------- Class B ----------
January 22, --------------------------------------------------- August 1,
1990(D) 1994(D)(D)
Year Ended August 31, Through Year Ended August 31, Through
------------------------------------ August 31, --------------------------------------------------- August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $12.33 $11.78 $11.40 $10.98 $ 11.14 $ 12.33 $ 11.78 $ 11.41 $ 10.98 $ 11.14 $11.63
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Income
from
investment
operations:
Net
investment
income... .58 .62 .66 .64 .39 .53 .58 .61 .60 .62 .04
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... (.68) .57 .38 .42 (.16) (.68) .57 .37 .43 (.16) (.07)
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Total
from
investment
opera-
tions... (.10) 1.19 1.04 1.06 .23 (.15) 1.15 .98 1.03 .46 (.03)
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Less
distributions
Dividends
from
net
investment
income... (.58) (.62) (.66) (.64) (.39) (.53) (.58) (.61) (.60) (.62) (.04)
Distributions
from net
realized
gains.. (.09) (.02) -- -- -- (.09) (.02) -- -- -- --
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Total
distri-
butions... (.67) (.64) (.66) (.64) (.39) (.62) (.60) (.61) (.60) (.62) (.04)
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
Net
asset
value,
end
of
period.. $11.56 $12.33 $11.78 $11.40 $ 10.98 $11.56 $12.33 $ 11.78 $ 11.41 $ 10.98 $11.56
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
------ ------ ------ ------ ------------ ------- ------- ------- ------- ------- ----------
TOTAL
RETURN#:... (0.87)% 10.45% 9.38% 9.93% 2.00% (1.26)% 9.99% 8.83% 9.64% 4.20% (.38)%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000)... $1,287 $894 $402 $229 $130 $24,489 $26,565 $24,746 $23,600 $24,080 $ 199@@
Average
net
assets
(000)... $1,179 $616 $291 $202 $87 $26,113 $25,387 $24,038 $23,997 $23,558 $ 200@@
Ratios
to
average
net
assets:@
Expenses,
including
distribution
fees... 1.25% 1.29% 1.22% 1.41% 1.46%* 1.65% 1.69% 1.62% 1.81% 1.78% 2.15%*
Expenses,
excluding
distribution
fees... 1.15% 1.19% 1.11% 1.31% 1.33%* 1.15% 1.19% 1.12% 1.31% 1.28% 1.40%*
Net
investment
income... 4.84% 5.15% 5.69% 5.73% 5.80%* 4.44% 4.75% 5.29% 5.33% 5.49% 3.86%*
Portfolio
turnover... 21% 27% 32% 56% 30% 21% 27% 32% 56% 30% 21%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total return for periods of less than one full year are not annualized.
@ Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares are
not necessarily comparable to that of the Class A or B shares and are not necessarily indicative of
future ratios.
@@ Figures are actual and not rounded to nearest thousand.
</TABLE>
See Notes to Financial Statements.
B-145
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Minnesota Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Minnesota Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 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, Minnesota Series, as of August 31, 1994, 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 17, 1994
B-146
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW JERSEY SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.8%
Atlantic City Mun.
Utils. Auth. Rev.,
Wtr. System,
A-* $2,000(D) 7.75%, 5/1/17.......... $2,296,380
Atlantic City, Gen.
Oblig., Ser. A,
Baa1 1,490 Zero Coupon, 11/1/06... 756,443
Bergen Cnty., Utils.
Auth., Wtr. Poll.
Ctrl. Rev., F.G.I.C.,
Aaa 1,000 5.75%, 12/15/05, Ser.
B.................... 1,030,910
Aaa 7,250 Zero Coupon, 12/15/08,
Ser. B................. 3,229,585
Aaa 1,000 5.50%, 12/15/15, Ser.
A.................... 936,800
Camden Cnty. Fin.
Auth.,
Aaa 1,600 Zero Coupon, 2/15/03,
F.S.A.................. 1,025,520
Camden Cnty. Mun.
Utils. Auth., Sewage
Rev.,
Aaa 1,750 8.25%, 12/1/17,
F.G.I.C.............. 1,958,320
Camden Cnty. Poll.
Ctrl. Fin. Auth.,
Solid Waste Res.
Recovery Rev.,
Baa1 2,000 6.70%, 12/1/99, Ser.
D.................... 2,026,100
Baa1 3,400 7.50%, 12/1/09, Ser.
B.................... 3,424,140
Cape May Cnty. Ind.
Poll. Ctrl., Fin.
Auth. Rev.,
Aaa 2,615 6.80%, 3/1/21,
M.B.I.A.............. 2,909,554
Cherry Hill Township,
Aa 1,000 5.90%, 6/1/05.......... 1,076,690
Aa 2,000 6.30%, 6/1/12.......... 2,125,480
Cinnaminson Sewage
Auth. Rev.,
A1 1,600 7.40%, 2/1/15.......... 1,803,008
Delaware River Jt. Toll
Bridge Comn., Bridge
Rev.,
A 3,050(D)@@ 7.875%, 7/1/18......... 3,429,938
Delaware River Port
Auth. Rev.,
Pennsylvania & New
Jersey River Bridges,
Aaa 4,470 7.375%, 1/1/07,
A.M.B.A.C............ 4,923,079
Edison Twnshp., Gen.
Oblig., A.M.B.A.C.,
Aaa $5,390 6.00%, 1/1/08.......... $5,559,408
Aaa 1,200 5.10%, 1/1/09.......... 1,112,256
Egg Harbor Twnshp. Sch.
Dist., Cert. of
Part.,
Aaa 1,000(D) 7.40%, 4/1/02,
M.B.I.A.............. 1,118,790
Essex Cnty. Impvt.
Auth.,
Aaa 1,600 5.50%, 12/1/20,
A.M.B.A.C............ 1,470,048
Evesham Mun. Utils.
Auth. Rev., Ser. B,
M.B.I.A.,
Aaa 2,000 7.00%, 7/1/10.......... 2,131,340
Guam Pwr. Auth. Rev.,
BBB* 1,750 6.30%, 10/1/22, Ser.
A.................... 1,691,813
Hammonton, Gen. Oblig.,
A.M.B.A.C.,
Aaa 500 6.85%, 8/15/03......... 556,560
Aaa 500 6.85%, 8/15/04......... 556,880
Aaa 500 6.85%, 8/15/05......... 557,155
Howell Twnshp. Mun.
Utils. Auth. Rev.,
NR 750(D) 8.60%, 1/1/14, 2nd
Ser.................. 861,990
Hudson Cnty. Impvt.
Auth. Fac., Lease
Rev.,
Aaa 1,750 6.00%, 12/1/25,
F.G.I.C.............. 1,718,290
Solid Waste Sys. Rev.,
BBB-* 6,500 7.10%, 1/1/20.......... 6,605,950
A+* 1,500 6.10%, 7/1/20.......... 1,488,270
Hudson Cnty. Qualified
Water of Jersey City,
Auth. Rev.
Aaa 1,200 5.00%, 12/15/17,
F.S.A................ 1,026,264
Irvington Twnshp., Gen.
Oblig.,
Aaa 700 5.00%, 10/1/17,
F.S.A................ 599,095
Jackson Twnshp. Sch.
Dist., F.G.I.C.,
Aaa 1,020 6.60%, 6/1/04.......... 1,116,584
Aaa 940 6.60%, 6/1/05.......... 1,027,768
Aaa 1,600 6.60%, 6/1/10.......... 1,720,496
Aaa 1,600 6.60%, 6/1/11.......... 1,717,936
</TABLE>
B-147 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Jersey City Swr. Auth.,
Aaa $4,150 4.50%, 1/1/19,
F.G.I.C.............. $3,226,003
Jersey City, Gen.
Oblig., F.S.A.,
Aaa 4,310 9.25%, 5/15/04, Ser.
A,................... 5,538,738
Jersey City, Redev.
Auth. Rev., Red Dixon
Mill Apts. Proj.,
AAA* 5,000 6.10%, 5/1/12,
F.N.M.A.............. 5,108,450
Lakewood Twnshp., Gen.
Oblig., F.G.I.C.,
Aaa 450 6.60%, 12/1/04......... 494,262
Aaa 445 6.60%, 12/1/05......... 487,960
Lenape Regl. High Sch.
Dist., Gen. Oblig.,
Aaa 400 7.625%, 1/1/12,
M.B.I.A.............. 476,640
Mercer Cnty. Impvt.
Auth. Rev.,
Aa1 2,500 Zero Coupon, 4/1/06.... 1,311,125
Aa1 2,725 Zero Coupon, 4/1/07.... 1,340,128
Solid Waste Site Proj.,
AAA* 1,500(D) 7.80%, 4/1/13, Ser.
A.................... 1,641,855
West Windsor Twnshp.
Police Proj.,
Aa 1,250 6.00%, 11/15/10........ 1,265,712
Middle Twnshp. Sch.
Dist.,
Aaa 1,200 7.00%, 7/15/05,
F.G.I.C.............. 1,348,860
Middlesex Cnty., Gen.
Oblig.,
Aaa 1,000 4.60%, 7/15/02......... 964,080
Monmouth Cnty. Impvt.
Auth. Rev., Asbury
Park Proj.,
Baa 1,315 7.375%, 12/1/09........ 1,406,826
Howell Twnshp. Brd. of
Ed. Proj. Rev.,
AA* 2,000 6.45%, 7/1/08.......... 2,158,380
Nat'l Auth. Rev.,
AA* 4,065 6.55%, 7/1/12.......... 4,350,363
Water & Sewage Facs
Rev.,
Aaa 1,600 5.00%, 2/1/13,
M.B.I.A.............. 1,406,768
Wtr. Treatment Fac.,
Aaa 750 6.875%, 8/1/12,
M.B.I.A.............. 833,228
New Jersey St. Bldg.
Auth. Rev., Garden
St. Svg. Bonds,
Aa 890 Zero Coupon, 6/15/03,
Ser. A............... 556,713
New Jersey St. Econ.
Dev. Auth., Amer.
Airlines Inc. Proj.,
Baa2 $4,000 7.10%, 11/1/31......... $4,028,800
Jersey Central Pwr. &
Light,
Aa 400 7.10%, 7/1/15.......... 422,140
Mkt. Transition Fac.
Rev., Sr.
Lien, Ser. A,
M.B.I.A.,
Aaa 2,000 5.80%, 7/1/08.......... 1,994,140
Aaa 2,250 5.80%, 7/1/09.......... 2,238,705
Nat'l. Assoc. of
Accountants,
NR 1,050 7.50%, 7/1/01.......... 1,110,606
NR 950 7.65%, 7/1/09.......... 998,963
Natural Gas Facs. Rev.,
A2 1,000 7.25%, 3/1/21, Ser.
B.................... 1,066,300
St. Barnabas Reality
Project,
Aaa 3,000 5.25%, 7/1/20,
M.B.I.A.............. 2,634,960
New Jersey St. Econ.
Dist. Heating &
Cool., Trigen Trenton
Proj.,
BBB-* 2,725 6.20%, 12/1/07, Ser.
B.................... 2,737,807
BBB-* 600 6.20%, 12/1/10......... 592,074
New Jersey St. Edl.
Facs. Fin. Auth.
Rev., Inst. For
Advanced Study,
Aaa 5,620 6.35%, 7/1/21, Ser.
B.................... 5,729,534
Ramapo College, Ser. E,
M.B.I.A.,
Aaa 1,170 5.35%, 7/1/07.......... 1,143,383
Aaa 1,240 5.40%, 7/1/08.......... 1,205,776
Seton Hall Univ. Proj.,
Aaa 680 6.25%, 7/1/07, Ser. B,
M.B.I.A.............. 707,513
Baa 2,900 7.00%, 7/1/21, Ser.
D.................... 3,037,576
Trenton St. Coll.,
Aaa 3,750 6.00%, 7/1/19,
A.M.B.A.C............ 3,720,862
New Jersey St. Hlth.
Care Facs. Fin. Auth.
Rev.,
Atlantic City Med.
Ctr.,
A 4,150 6.80%, 7/1/11, Ser.
C.................... 4,315,294
</TABLE>
B-148 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
New Jersey St. Hlth.
Care Facs. Fin. Auth.
Rev.,
Burdette Tomlin Mem. Hosp.,
Aaa $1,000(D) 8.125%, 7/1/12, Ser. C,
F.G.I.C.,.............. $1,109,560
Deborah Heart & Lung
Ctr.,
Baa1 1,000 6.20%, 7/1/13.......... 972,850
Baa1 1,100 6.30%, 7/1/23.......... 1,061,676
East Orange Gen. Hosp.,
BBB+* 2,250 7.75%, 7/1/20, Ser.
B.................... 2,376,428
Helene Fuld Med. Ctr.,
A* 2,700 8.00%, 7/1/08, Ser.
C.................... 2,971,998
A* 500 8.125%, 7/1/13, Ser.
C.................... 553,785
Intercare Hlth. Systems-JFK
Ctr.,
A 1,000 7.50%, 7/1/07.......... 1,082,230
A 1,000 7.625%, 7/1/18......... 1,072,510
Jersey Shore Med. Ctr.
Aaa 1,465 6.00%, 7/1/09,
A.M.B.A.C............ 1,473,468
Aaa 1,500 6.25%, 7/1/21.......... 1,502,310
Kensington Cmnty. Med.
Ctr.,
Aaa 3,700 7.00%, 7/1/20,
M.B.I.A.............. 3,971,543
Shore Mem. Hosp., Ser.
C,
Aaa 3,000(D) 7.875%, 7/1/07,
M.B.I.A.............. 3,312,360
St. Claires Riverside
Med. Ctr.,
Aaa 1,750(D) 7.60%, 7/1/02, Ser. D,
B.I.G................ 1,918,088
Aaa 1,380(D) 7.75%, 7/1/14,
B.I.G................ 1,517,986
St. Peters Med. Ctr.,
M.B.I.A.,
Aaa 1,725(D) 6.50%, 7/1/07, Ser.
E.................... 1,887,167
New Jersey St. Hsg. &
Mtge. Fin. Agcy.,
M.B.I.A.
Aaa 6,560 7.70%, 10/1/29, Ser.
D.................... 6,823,450
Multi-family Hsg. Rev.,
AAA* 8,000 7.00%, 5/1/30,
F.H.A................ 8,188,800
Tiffany Manor,
A+* 2,190 6.75%, 11/1/11, Ser.
B.................... 2,262,182
New Jersey St. Hwy.
Auth.,
Garden St. Pkwy. Gen.
Rev.,
A1 3,035 6.20%, 1/1/10.......... 3,094,941
Aaa 4,365(D) 7.25%, 1/1/16.......... 4,836,900
New Jersey St. Tpke.
Auth. Rev.,
A $2,000 6.75%, 1/1/08, Ser.
A.................... $2,122,560
A 1,000 6.50%, 1/1/09, Ser.
C.................... 1,065,390
A 14,835 6.50%, 1/1/16, Ser.
C.................... 15,572,596
New Jersey St.
Trans.Trust Fund
Auth.,
Aa 2,000 6.00%, 6/15/02, Ser.
A.................... 2,096,000
New Jersey St.
Wastewater Treatment,
Trust Loan Rev.,
Aa 1,000 6.875%, 6/15/06........ 1,084,440
Aa 7,090 6.875%, 6/15/08........ 7,633,874
Aa 1,000 6.00%, 7/1/09, Ser.
A.................... 1,010,130
North Brunswick
Twnshp., Brd. of Ed.,
AA* 350 6.80%, 6/15/06......... 387,121
AA* 350 6.80%, 6/15/07......... 385,924
Rict Hosp. Rev.,
Aa 2,000 6.40%, 5/15/10......... 2,109,460
Old Bridge Twnshp. Mun.
Utils. Auth., Sys.
Rev.,
Aaa 1,000(D) 8.00%, 11/1/16,
F.G.I.C.............. 1,091,070
Paterson Cnty.,
Aaa 2,000 6.50%, 2/15/05,
F.S.A................ 2,134,240
Pennsauken Twnshp.,
Brd. of Ed., Cert. of
Part.,
Aaa 1,030 7.70%, 7/15/09,
B.I.G................ 1,159,069
Pequannock Twnshp. Brd.
of Ed., Cert. of
Part.,
Aaa 750 7.875%, 3/1/08,
B.I.G................ 803,070
Port Auth. of New York
& New Jersey,
A1 3,505 5.00%, 7/15/15, Ser.
92................... 3,019,698
A1 1,000 5.20%, 9/1/18, Ser.
85................... 875,950
A1 2,000 5.00%, 7/15/23, Ser.
92................... 1,669,800
A1 5,300 7.125%, 6/1/25, Ser.
69................... 5,807,157
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 3,000 5.40%, 7/1/07,
M.B.I.A.............. 2,985,990
Aaa 3,000 5.50%, 7/1/08,
M.B.I.A.............. 2,999,850
Aaa 1,000 7.00%, 7/1/10,
M.B.I.A.............. 1,121,990
Aaa 4,000 7.00%, 7/1/10,
A.M.B.A.C............ 4,487,960
</TABLE>
B-149 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Puerto Rico Elec. Pwr.
Auth. Rev. Ref.,
Baa1 $2,300 6.125%, 7/1/08, Ser.
S.................... $2,376,843
Baa1 1,500(D) 8.40%, 7/1/15, Ser.
L.................... 1,677,720
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 625 7.50%, 4/1/22.......... 650,531
Sngl. Fam. Mtge.,
Baa 1,785 5.125%, 12/1/05........ 1,673,652
Baa 1,000 5.25%, 12/1/06......... 934,660
Puerto Rico Hsg. Fin.
Corp., Bank & Fin.
Agcy.,
Baa 2,475 5.125%, 12/1/05........ 2,320,610
Puerto Rico Hwy. Auth.
Rev.,
Baa1 1,000 6.75%, 7/1/05, Ser.
R.................... 1,088,150
AAA* 2,000(D) 7.75%, 7/1/10, Ser.
Q.................... 2,318,340
Baa1 5,550(D) 7.75%, 7/1/16, Ser.
Q.................... 6,433,393
Baa1 750(D) 6.50%, 7/1/22, Ser.
S.................... 825,638
Puerto Rico Pub. Bldgs.
Auth.,
Pub. Ed. & Hlth.
Facs.,
Aaa 5,500(D) 7.875%, 7/1/16, Ser.
H.................... 6,088,170
Aaa 3,750(D) 6.875%, 7/1/21, Ser.
L.................... 4,218,112
Puerto Rico Tel. Auth.
Rev.,
Aaa 7,875 D)(D) 7.133%, 1/25/07, Ser.
I,
M.B.I.A................ 7,382,812
A 2,000 5.50%, 1/1/22, Ser.
I.................... 1,821,440
Rutgers St. Univ. Rev.,
A1 2,000 5.10%, 5/1/05, Ser.
S.................... 1,945,360
Aaa 1,500(D)@ 8.10%, 5/1/07, Ser.
A.................... 1,657,545
A1 2,810 6.85%, 5/1/12, Ser.
P.................... 2,990,739
A1 5,000 6.40%, 5/1/13, Ser.
A.................... 5,210,700
Sayreville, Hsg. Dev.
Corp., Mtge. Rev.,
AAA* 1,990 7.75%, 8/1/24,
F.H.A................ 2,079,550
South Brunswick
Twnshp., Wtr. & Swr.
Utils., Gen. Impvt.,
Aa 850 6.90%, 8/1/05.......... 944,945
Aa 850 6.90%, 8/1/06.......... 944,945
Stony Brook Regl. Swr.
Auth. New Jersey
Rev.,
AA $2,895 5.45%, 12/1/12, Ser.
B.................... $2,695,245
Union Cnty. Utils.
Auth.,
Solid Waste Rev.,
Ser. A,
A-* 1,255 7.10%, 6/15/06......... 1,302,288
A-* 6,850 7.20%, 6/15/14......... 7,057,281
Virgin Islands Port
Auth., Marine Div.
Rev.,
NR 1,330 10.125%, 11/1/05, Ser.
A.................... 1,433,461
Virgin Islands Pub.
Fin. Auth. Rev., Hwy.
Trans. Trust Fund,
BBB* 2,750 7.70%, 10/1/04......... 3,005,393
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
NR 2,070 7.75%, 10/1/06, Ser.
91................... 2,263,400
Virgin Islands Wtr. &
Pwr. Auth., Wtr. Sys.
Rev.,
NR 1,400 8.50%, 1/1/10, Ser.
A.................... 1,537,984
West Morris Regl. High
Sch. Dist., Cert. of
Part.,
Aaa 1,500 7.50%, 3/15/09,
B.I.G................ 1,666,425
West New York & New
Jersey, Mun. Utils.,
Auth. Swr. Rev.,
F.G.I.C.,
Aaa 3,540 Zero Coupon,
12/15/06............. 1,800,019
Aaa 1,410 Zero Coupon,
12/15/12............. 481,656
Aaa 2,910 Zero Coupon,
12/15/13............. 930,327
------------
Total long-term
investments
(cost
$318,743,174)........ 330,560,269
------------
</TABLE>
B-150 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--1.3%
Port Auth. of New York
& New Jersey, Spec.
Oblig. Rev.,
F.R.D.D.,
3.30%, 9/1/94, Ser.1
VMIG1 $4,500 (cost $4,500,000)...... $4,500,000
------------
Total Investments--99.1%
(cost $323,243,174;
Note 4).............. 335,060,269
Other assets in excess
of
liabilities--0.9%.... 3,030,153
------------
Net Assets--100%....... $338,090,422
------------
------------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
F.N.M.A.--Federal National Mortgage Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par, or the
next date on which the rate of interest is
adjusted.
* Standard & Poor's Rating.
@ Pledged as initial margin on financial futures
contracts.
@@ $3,050,000 par amount pledged as initial margin
on financial futures contracts.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-151 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
-----------------
<S> <C>
Investments, at value (cost $323,243,174).............................................. $ 335,060,269
Cash................................................................................... 58,351
Interest receivable.................................................................... 4,571,316
Receivable for Fund shares sold........................................................ 547,496
Deferred expenses and other assets..................................................... 6,110
-----------------
Total assets....................................................................... 340,243,542
-----------------
Liabilities
Payable for Fund shares reacquired..................................................... 1,533,259
Dividends payable...................................................................... 285,075
Due to Distributors.................................................................... 139,140
Due to Manager......................................................................... 108,144
Accrued expenses....................................................................... 64,773
Due to broker--variation margin payable................................................ 21,719
Deferred trustees' fees................................................................ 1,010
-----------------
Total liabilities.................................................................. 2,153,120
-----------------
Net Assets............................................................................. $ 338,090,422
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 312,787
Paid-in capital in excess of par..................................................... 329,008,551
-----------------
329,321,338
Accumulated net realized loss on investments......................................... (3,005,261)
Net unrealized appreciation on investments........................................... 11,774,345
-----------------
Net assets, August 31, 1994.......................................................... $ 338,090,422
-----------------
-----------------
Class A:
Net asset value and redemption price per share ($14,773,509 / 1,366,763 shares of
beneficial interest issued and outstanding)........................................ $10.81
Maximum sales charge (3.0% of offering price)........................................ .33
-----------------
Maximum offering price to public..................................................... $11.14
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share ($323,077,216 /
29,889,734 shares of beneficial interest issued and outstanding)................... $10.81
-----------------
-----------------
Class C:
Net asset value, offer price and redemption price per share ($239,697 / 22,176 shares
of
beneficial interest issued and outstanding)........................................ $10.81
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-152
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1994
---------------
<S> <C>
Income
Interest........................... $ 21,572,767
---------------
Expenses
Management fee, net of waiver of
$449,095........................... 1,347,284
Distribution fee--Class A.......... 15,334
Distribution fee--Class B.......... 1,719,706
Transfer agent's fees and
expenses........................... 131,000
Custodian's fees and expenses...... 105,000
Reports to shareholders............ 71,000
Registration fees.................. 31,000
Legal fees......................... 15,000
Audit fee.......................... 10,500
Insurance expense.................. 9,500
Trustees' fees..................... 3,375
Miscellaneous...................... 14,444
---------------
Total expenses................... 3,473,143
---------------
Net investment income................ 18,099,624
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions............ (628,763)
Financial futures contract
transactions....................... (493,700)
Options............................ (172,482)
---------------
(1,294,945)
---------------
Net change in unrealized
appreciation/depreciation on:
Investments........................ (23,336,875)
Financial futures contracts........ 39,750
---------------
(23,297,125)
---------------
Net loss on investments.............. (24,592,070)
---------------
Net Decrease in Net Assets
Resulting from Operations............ $ (6,492,446)
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) in ----------------------------
Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income................. $ 18,099,624 $ 17,308,485
Net realized gain
(loss) on investment
transactions......... (1,294,945) 4,417,042
Net change in
unrealized
appreciation/depreciation
of investments....... (23,297,125) 16,729,314
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations........... (6,492,446) 38,454,841
------------ ------------
Dividends and distributions (Note 1)
Dividends from net
investment income
Class A.............. (831,601) (755,963)
Class B.............. (17,267,981) (16,552,522)
Class C.............. (42) --
------------ ------------
(18,099,624) (17,308,485)
------------ ------------
Distributions from net realized
gains
Class A.............. (237,645) (130,182)
Class B.............. (5,452,932) (3,218,353)
------------ ------------
(5,690,577) (3,348,535)
------------ ------------
Series share transactions
(Note 5)
Net proceeds from
shares sold.......... 41,819,711 66,639,119
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 14,387,672 12,440,617
Cost of shares
reacquired........... (55,213,009) (37,221,332)
------------ ------------
Net increase in net
assets from Series
share transactions... 994,374 41,858,404
------------ ------------
Total increase
(decrease)............. (29,288,273) 59,656,225
Net Assets
Beginning of year........ 367,378,695 307,722,470
------------ ------------
End of year.............. $338,090,422 $367,378,695
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-153
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984, and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
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, 1994.
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
B-154
<PAGE>
issue discount paid on purchases of portfolio securities as adjustments to
interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for short-term capital gains and market discount.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''). PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the year ended August 31, 1994, PMF waived 25% of its management fee. The amount
of fees waived for the year ended August 31, 1994, amounted to $449,095 ($0.014
per share; 0.13% 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $94,600 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $447,600 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.
B-155
<PAGE>
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1994, the Series incurred fees of approximately
$116,700 for the services of PMFS. As of August 31, 1994, approximately $9,400
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994, were $119,491,311 and $117,750,762, respectively.
At August 31, 1994 the Series sold 50 financial futures contracts on the
Municipal Bond Index which expire in September 1994 and sold 35 financial
futures contracts on U.S. Treasury Bonds which expire in December 1994. The
value at disposition of such contracts was $8,133,969. The value of such
contracts on August 31, 1994 was $8,176,719, thereby resulting in an unrealized
loss of $42,750.
The federal income tax basis of the Series' investments at August 31, 1994,
was $323,255,449 and, accordingly, net unrealized appreciation for federal
income tax purposes was $11,804,820 (gross unrealized appreciation-$15,604,377;
gross unrealized depreciation-$3,799,557).
The Fund will elect to treat net capital losses of approximately $2,941,904
incurred in the ten month period ended August 31, 1994 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 commencing on or about February 1995.
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, 1994:
Shares sold...................... 314,116 $ 3,550,381
Shares issued in reinvestment
of dividends and
distributions.................. 62,184 699,684
Shares reacquired................ (329,592) (3,698,430)
---------- ------------
Net increase in shares
outstanding.................... 46,708 $ 551,635
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold...................... 481,101 $ 5,443,721
Shares issued in reinvestment
of dividends and
distributions.................. 49,263 555,537
Shares reacquired................ (280,954) (3,184,387)
---------- ------------
Net increase in shares
outstanding.................... 249,410 $ 2,814,871
---------- ------------
---------- ------------
Class B
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
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold...................... 5,414,811 $ 61,195,397
Shares issued in reinvestment
of dividends and
distributions.................. 1,055,089 11,885,079
Shares reacquired................ (3,024,547) (34,036,945)
---------- ------------
Net increase in shares
outstanding.................... 3,445,353 $ 39,043,531
---------- ------------
---------- ------------
Class C
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 of Class C shares.
</TABLE>
B-156
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class C
------------------------------------------------------- Class B -----------
January 22, ---------------------------------------------------- August 1,
1990(D) 1994(D)(D)
Year Ended August 31, through Year Ended August 31, through
----------------------------------------- August 31, ---------------------------------------------------- August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period. $ 11.74 $ 11.15 $ 10.73 $10.16 $ 10.30 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 10.83
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Income
from
investment
operations
Net
investment
income@... .61 .64 .67 .69 .41 .56 .59 .63 .65 .67 .04
Net
realized
and
unrealized
gain
(loss) on
investment
trans-
actions.. (.75) .71 .51 .59 (.14) (.75) .71 .51 .59 (.14) (.02)
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Total
from
investment
oper-
ations.. (.14) 1.35 1.18 1.28 .27 (.19) 1.30 1.14 1.24 .53 .02
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Less
distributions
Dividends
from
net
investment
income... (.61) (.64) (.67) (.69) (.41) (.56) (.59) (.63) (.65) (.67) (.04)
Distributions
from net
realized
gains on
investment
trans-
actions.. (.18) (.12) (.09) (.02) -- (.18) (.12) (.09) (.02) (.03) --
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Total
distri-
butions.. (.79) (.76) (.76) (.71) (.41) (.74) (.71) (.72) (.67) (.70) (.04)
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
Net
asset
value,
end
of
period.$ 10.81 $ 11.74 $ 11.15 $10.73 $ 10.16 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.81
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
------------ ------- ------- ------ ----------- -------- -------- -------- -------- -------- -----------
TOTAL
RETURN#:. (1.27)% 12.57% 11.35% 12.96% 2.70% (1.67)% 12.12% 10.93% 12.52% 5.28% 0.14%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000).$ 14,774 $15,501 $11,941 $8,041 $ 3,616 $323,077 $351,878 $295,781 $244,322 $180,636 $ 240
Average
net
assets
(000).$ 15,334 $13,444 $ 9,759 $5,637 $ 1,902 $343,941 $316,372 $269,318 $208,893 $155,162 $ 11
Ratios
to
average
net
assets:@##
Expenses,
including
distribution
fees... .58% .61% .48% .29% .20%* .98% 1.01% .88% .69% .50% 1.29%*
Expenses,
excluding
distribution
fees... .48% .51% .38% .19% .10%* .48% .51% .38% .19% .10% .54%*
Net
investment
income... 5.42% 5.63% 6.14% 6.58% 6.79%* 5.02% 5.23% 5.74% 6.18% 6.50% 5.06%*
Portfolio
turnover... 34% 32% 38% 116% 87% 34% 32% 38% 116% 87% 34%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
@ Net of management and/or distribution fee waiver.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on
the first day and a sale on the last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not annualized.
## Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares are not
necessarily comparable to that of Class A or B shares and are not necessarily indicative of future ratios.
</TABLE>
See Notes to Financial Statements.
B-157
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New Jersey Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 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, 1994, 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 17, 1994
B-158
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW JERSEY MONEY MARKET SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Atlantic Cnty. Impvt.
Auth. Rev.,
3.05%, 9/7/94, Ser. 86,
VMIG1 $ 1,300 F.R.W.D............... $ 1,300,000
Bayonne,
NR 4,475 3.29%, 9/30/94, B.A.N.,. 4,476,006
NR 980 3.29%, 9/30/94, T.A.N.,. 980,220
Cape May Cnty. Mun.
Utils. Auth., Waste
Rev., M.T.,
SP1+* 4,500 2.80%, 11/30/94......... 4,500,000
Gloucester Cnty. Ind.
Poll. Ctrl.,
Fin. Auth. Rev.,
F.R.W.D.,
P1 4,610 2.70%, 9/7/94, Ser. 92.. 4,610,000
P1 3,120 3.15%, 9/7/94........... 3,120,000
Hudson Cnty., T.A.N.,
NR 4,000 4.17%, 2/17/95.......... 4,003,956
Hudson Cnty. Impvt.
Auth.,
Pooled Gov't. Loan
Prog., F.R.W.D.,
A-1* 4,445 3.45%, 9/8/94, Ser.86... 4,445,000
Jersey City, Gen.
Oblig.,
NR 8,000 3.50%, 9/30/94.......... 8,002,484
Millburn Twnshp.,
T.A.N.,
NR 3,500 3.02%, 11/15/94......... 3,500,820
Montgomery Twnshp.,
B.A.N.,
NR 2,806 3.00%, 12/16/94......... 2,809,463
New Jersey St. Econ.
Dev. Auth.,
VMIG1 2,000 2.85%, 9/1/94, F.R.D.D.. 2,000,000
NR 1,860 3.30%, 9/1/94, F.R.D.D.. 1,860,000
VMIG1 4,115 4.10%, 9/1/94, F.R.W.D.. 4,115,000
A1+* 500 3.15%, 9/7/94,
F.R.W.D............... 500,000
Applewood Ctr. for
Aging,
A-1* 9,050 2.95%, 9/1/94, Ser. 89.. 9,050,000
Catholic Cmnty. Svcs
Proj.,
VMIG1 6,000 3.05%, 9/1/94, F.R.W.D.. 6,000,000
Chambers Cogeneration
Ltd., Ser.91,
T.E.C.P.,
VMIG1 $ 4,400 2.80%, 9/8/94........... $ 4,400,000
VMIG1 3,000 2.85%, 9/13/94.......... 3,000,000
Franciscan Oaks Proj.
Ser. B,
A1+* 1,600 2.90%, 9/7/94, F.R.W.D.. 1,600,000
Gen. Motors Project,
VMIG2 7,350 3.10%, 9/7/94, F.R.W.D.. 7,350,000
Hoffman Louisiana Roche
Inc. Proj.,
NR 7,600 3.30%, 9/1/94,
F.R.D.D............... 7,600,000
Kent Place,
3.05%, 9/1/94, Ser. 92L,
VMIG1 1,940 F.R.D.D............... 1,940,000
Marriot Corp. Proj.,
3.05%, 9/7/94, Ser. 84,
P1 6,700 F.R.W.D............... 6,700,000
Peddie Sch. Proj. Ser. B,
A-1* 3,000 3.20%, 9/1/94, F.R.D.D... 3,000,000
Rev. Adj. Assoc.,
Aa3 1,580 3.20%, 9/1/94, F.R.D.D... 1,580,000
Russ Berrie & Co.,
3.10%, 9/7/94, Ser. 83,
A-1* 200 F.R.W.D............... 200,000
New Jersey St. Hsg. &
Mtge.
Fin. Agcy., Rev.,
M.T.,
VMIG1 3,665 2.95%, 9/29/94.......... 3,665,000
New Jersey St. Tpke.
Auth. Rev.,
2.95%, 9/7/94, Ser. 91D,
VMIG1 9,400 F.R.W.D............... 9,400,000
New Jersey St., O.T.,
VMIG1 4,700 3.75%, 2/15/95, Ser. A-4 4,700,000
North Brunswick Twnshp.
B.A.N.,
NR 3,400 3.79%, 4/7/95........... 3,403,611
Port Auth. of New York &
New Jersey,
KIAC Partners,
F.R.W.D.,
VMIG1 2,900 2.95%, 9/7/94, Ser. 3... 2,900,000
Spec. Oblig. Rev.,
F.R.D.D.,
VMIG1 3,200 3.20%, 9/1/94........... 3,200,000
VMIG1 9,200 3.30%, 9/1/94, Ser.1.... 9,200,000
NR 8,000 3.1251%, 9/6/94......... 8,000,000
</TABLE>
B-159 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
F.R.W.D.,
VMIG1 $ 1,200 2.90%, 9/7/94, Ser.
85.................... $ 1,200,000
So. Brunswick Twnshp.,
T.A.N.,
NR 5,500 3.65%, 2/15/95.......... 5,509,725
Union Ind. Poll. Ctrl.
Fin. Auth. Rev.,
Poll. Ctrl. Rev.,
T.E.C.P.,
P1 2,700 3.20%, 9/29/94.......... 2,700,000
------------
Total Investments--98.9%
(amortized
cost--$156,521,285**)... 156,521,285
Assets in excess of
other
liabilities--1.1%..... 1,758,637
------------
Net Assets--100%........ $158,279,922
------------
------------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
O.T.--Optional Tender.
M.T.--Mandatory Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax Exempt Commercial Paper.
# For purposes of amortized cost valuation, the maturity date of 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.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-160 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at amortized cost which approximates market value........................... $ 156,521,285
Cash..................................................................................... 69,056
Receivable for Series shares sold........................................................ 3,659,882
Interest receivable...................................................................... 828,999
Receivable for investments sold.......................................................... 220,000
Other assets............................................................................. 12,574
---------------
Total assets......................................................................... 161,311,796
---------------
Liabilities
Payable for Series shares reacquired..................................................... 2,865,662
Dividends payable........................................................................ 67,128
Management fee payable................................................................... 50,719
Accrued expenses and other liabilities................................................... 38,112
Distribution fee payable................................................................. 9,243
Deferred trustees' fees.................................................................. 1,010
---------------
Total liabilities.................................................................... 3,031,874
---------------
Net Assets............................................................................... $ 158,279,922
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................... $ 1,582,799
Paid-in capital in excess of par....................................................... 156,697,123
---------------
Net assets, August 31, 1994............................................................ $ 158,279,922
---------------
---------------
Net asset value, offering price and redemption price per share ($158,279,922 /
158,279,922 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized)................................................................... $1.00
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-161
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
----------
<S> <C>
Income
Interest and discount earned.......... $4,316,194
----------
Expenses
Management fees, net of waiver of
$211,404.............................. 634,212
Distribution fee...................... 211,404
Transfer agent's fees and expenses.... 88,000
Custodian's fees and expenses......... 76,000
Reports to shareholders............... 69,500
Registration fees..................... 25,000
Legal fees............................ 15,000
Audit fee............................. 10,000
Deferred organization expenses........ 6,639
Insurance expense..................... 4,400
Trustees' fees........................ 3,375
Miscellaneous......................... 2,672
----------
Total expenses................... 1,146,202
----------
Net investment income................... 3,169,992
----------
Net Increase in Net Assets
Resulting from Operations............... $3,169,992
----------
----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ------------------------------
in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income................ $ 3,169,992 $ 3,443,063
------------- -------------
Net increase in net
assets resulting
from operations..... 3,169,992 3,443,063
------------- -------------
Dividends and
distributions......... (3,169,992) (3,443,063)
------------- -------------
Series share
transactions
(at $1 per share)
Net proceeds from
shares sold......... 556,557,575 492,846,812
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends........... 3,057,774 3,379,946
Cost of shares
reacquired............ (564,422,228) (497,232,130)
------------- -------------
Net decrease in net
assets from Series
share
transactions........ (4,806,879) (1,005,372)
------------- -------------
Total decrease.......... (4,806,879) (1,005,372)
Net Assets
Beginning of year....... 163,086,801 164,092,173
------------- -------------
End of year............. $ 158,279,922 $ 163,086,801
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-162
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Deferred Organization Expenses: The Series incurred $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, 1994, PMF waived 25% of its managements fee.
The amount of such fees waived for the year ended August 31, 1994 amounted to
$211,404 ($.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-163
<PAGE>
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$82,500 for the services of PMFS. As of August 31, 1994, approximately $6,700 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-164
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
December 3,
1990*
Year Ended August 31, Through
---------------------------------- August 31,
1994 1993 1992 1991
---------- -------- -------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains(D)...................... .02 .02 .04 .03
Dividends and distributions.......................................... (.02) (.02) (.04) (.03)
---------- -------- -------- -----------
Net asset value, end of period....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
---------- -------- -------- -----------
---------- -------- -------- -----------
TOTAL RETURN#:....................................................... 1.90% 2.31% 3.48% 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...................................... $ 158,280 $163,087 $164,092 $ 117,460
Average net assets (000)............................................. $ 169,123 $170,103 $155,915 $ 89,273
Ratios to average net assets(D):
Expenses, including distribution fee............................... .68% .64% .32% .13%**
Expenses, excluding distribution fee............................... .55% .51% .19% .00%**
Net investment income.............................................. 1.87% 2.02% 3.33% 4.48%**
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of management fee waiver and/or expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total
returns for periods of less than one year are not annualized.
See Notes to Financial Statements.
B-165
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New Jersey Money Market Series, including the
portfolio of investments, as of August 31, 1994, 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
three 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, 1994 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 Money Market Series, as stated August 31, 1994, the
results of its operations, the changes in its net assets, and its financial
highlights for the respective periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
New York, New York
October 17, 1994
B-166
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW YORK SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.3%
Babylon Ind. Dev. Agcy.
Res. Rec. Rev.,
Babylon Cmnty.
Waste Mgmt. Facs.,
Baa1 $ 3,520(D) 7.875%, 7/1/06, Ser.
A.................... $ 4,040,890
Ogden Martin Sys. Inc.,
Baa1 495 8.50%, 1/1/19, Ser.
B.................... 540,718
Baa1 3,450 8.50%, 1/1/19, Ser.
C.................... 3,768,642
Buffalo Swr. Auth. Sys.
Rev., F.G.I.C.,
Aaa 1,400 5.00%, 7/1/12, Ser.
G.................... 1,222,830
City of New Rochelle
Ind. Dev. Agcy.,
Coll. of New
Rochelle,
BBB-* 500 6.625%, 7/1/12......... 508,785
BBB-* 2,000 6.75%, 7/1/22.......... 2,035,660
Clifton Park Wtr.
Auth.,
Wtr. Sys. Rev.
Aaa 2,000 5.00%, 10/1/26,
F.G.I.C.............. 1,662,560
Dutchess Cnty. Res.
Rec. Agcy. Rev.,
Solid Waste Mgmt.,
F.G.I.C.,
Aaa 1,150 7.50%, 1/1/09, Ser.
A.................... 1,271,026
Great Neck No. Wtr.
Auth., Wtr. Sys.
Rev.,
A1 1,750(D) 7.00%, 1/1/18, Ser.
A.................... 1,937,075
Guam Pwr. Auth. Rev.,
BBB* 1,750 6.30%, 10/1/22, Ser.
A.................... 1,691,813
Islip Res. Rec.,
A.M.B.A.C.,
Aaa 1,745 7.20%, 7/1/10, Ser.
B.................... 1,964,556
Jefferson Cnty. Ind.
Dev. Agcy. Solid
Waste Disp. Rev.,
Baa1 1,500 7.20%, 12/1/20......... 1,571,100
Metro. Trans. Auth.
Facs. Rev., Commuter
Facs.,
Baa1 1,000 5.75%, 7/1/13, Ser.
O.................... 934,510
Baa1 5,000 6.00%, 7/1/21.......... 4,744,550
Zero Coupon, 7/1/12,
Ser. N,
F.G.I.C.............. 1,886,190
Aaa 5,575
Trans. Facs.,
Baa1 2,500 5.75%, 7/1/08, Ser.
O.................... 2,403,000
Baa1 3,000 7.00%, 7/1/12, Ser.
5.................... 3,154,740
Baa1 1,000 5.75%, 7/1/13, Ser.
O.................... 934,510
Nassau Cnty. Ind. Dev.
Agcy. Rev., Hofstra
Univ. Proj.,
A $ 2,500(D) 8.25%, 7/1/03.......... $ 2,810,525
Long Beach Proj.,
NR 1,420** 9.25%, 1/1/97.......... 894,600
S&S Incinerator Jt.
Venture Proj.,
NR 2,785** 9.00%, 1/1/07.......... 1,754,550
Nassau Cnty. Swr. Gen.
Oblig., F.G.I.C.,
Ser. B
Aaa 3,000 4.75%, 5/1/06.......... 2,711,730
Aaa 3,845 4.80%, 5/1/07.......... 3,445,620
New York City, Gen.
Oblig.,
Baa1 1,900 8.00%, 6/1/99, Ser.
B.................... 2,123,668
Baa1 4,000 7.50%, 2/1/01, Ser.
B.................... 4,395,640
Baa1 3,500 7.75%, 3/15/03, Ser.
A.................... 3,880,275
Baa1 2,500 8.00%, 8/1/03, Ser.
D.................... 2,853,200
Baa1 3,000 8.20%, 11/15/03, Ser.
F.................... 3,452,340
Baa1 3,040 7.70%, 2/1/09, Ser.
D.................... 3,365,250
Baa1 2,275 7.00%, 10/1/10, Ser.
B.................... 2,388,864
New York City Ind. Dev.
Agcy.,
Spec. Fac. Rev.,
Term. One Group
Assoc. Proj.,
A 5,000 6.00%, 1/1/15.......... 4,773,750
Y.M.C.A. Of Greater
N.Y. Proj.,
NR 1,350 8.00%, 8/1/16.......... 1,442,907
New York City Mun. Wtr.
Fin. Auth. Rev., Wtr.
& Swr. Sys.,
5.50%, 6/15/11, Ser. F,
A.M.B.A.C............ 1,419,645
Aaa 1,500
Aaa 4,000(D)@ 7.375%, 6/15/13, Ser.
C.................... 4,588,640
7.25%, 6/15/15, Ser. A,
Aaa 3,000 M.B.I.A................ 3,388,530
5.75%, 6/15/20, Ser.F,
Aaa 3,250 M.B.I.A................ 3,058,607
New York City Transit
Auth.,
5.40%, 1/1/18, Ser.
Aaa 7,900 1993, F.S.A.......... 7,098,150
</TABLE>
B-167 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
New York St. Dorm.
Auth. Rev.,
City Univ. Sys.
Cons.,
Baa1 $ 5,000 8.75%, 7/1/02, Ser.
D.................... $ 6,040,000
Aaa 5,000(D)@ 8.00%, 7/1/07, Ser.
A.................... 5,551,100
Baa1 3,435 8.125%, 7/1/07, Ser.
A.................... 3,813,984
Baa1 1,880 7.00%, 7/1/09, Ser.
D.................... 2,031,904
Aaa 3,500 7.50%, 7/1/10, Ser. C,
F.G.I.C.............. 4,058,810
Baa1 2,000 5.75%, 7/1/18, Ser.
A.................... 1,851,080
Coll. & Univ. Ed.,
Zero Coupon, 7/1/04,
M.B.I.A.............. 1,320,054
Aaa 2,255
Columbia Univ.,
Aaa 4,750 4.75%, 7/1/14, Ser.
A.................... 3,979,170
Dept. of Hlth.,
Baa1 2,000 5.50%, 7/1/20.......... 1,757,820
Episcopal Hlth. Svcs.,
AAA* 4,500 7.55%, 8/1/29,
G.N.M.A.............. 4,918,500
Fordham Univ.,
Aaa 4,000 5.50%, 7/1/23,
F.G.I.C.............. 3,645,560
Long Island Med. Ctr.,
F.H.A.,
Aa 3,595 7.625%, 8/15/08, Ser.
A.................... 3,934,763
Aa 4,100 7.75%, 8/15/27, Ser.
A.................... 4,488,475
Menorah Campus,
AA* 3,000 7.40%, 2/1/31,
F.H.A................ 3,296,010
Spec. Act Sch.
Districts,
Aaa 3,050 7.00%, 7/1/13,
F.G.I.C.............. 3,281,739
St. Univ. Edl. Facs.,
Baa1 500 5.50%, 5/15/08, Ser.
A.................... 471,025
Baa1 6,800 5.50%, 5/15/13, Ser.
A.................... 6,199,356
5.25%, 5/15/15, Ser. A,
A.M.B.A.C............ 1,974,412
Aaa 2,200
7.25%, 5/15/15, Ser. B,
F.G.I.C.............. 2,829,700
Aaa 2,500
Aaa 1,770(D) 7.25%, 5/15/18, Ser.
A.................... 2,025,252
Univ. of Rochester
Strong Mem. Hosp.,
A1 5,000 5.50%, 7/1/21.......... 4,490,650
New York St. Energy
Resh. & Dev. Auth.
Rev.,
Brooklyn Union Gas
Co.,
A1 $ 5,225 7.125%, 12/1/20, Ser.
1.................... $ 5,531,864
Aaa 3,000 6.75%, 2/1/24,
M.B.I.A.............. 3,125,310
Aaa 2,000(D)(D) 5.60%, 6/1/25,
M.B.I.A.............. 1,785,780
7.914%, 7/8/26, Ser. D,
Aaa 2,000 M.B.I.A.............. 1,645,000
Con. Edison Co.,
Aa3 6,735 7.50%, 7/1/25.......... 7,200,254
Aa3 4,775 7.50%, 1/1/26.......... 5,129,735
New York St. Environ.
Facs. Corp., Poll.
Ctrl. Rev.,
St. Wtr. Revolving
Fund,
Aa 5,000 7.25%, 6/15/10......... 5,460,400
Aa 1,300 7.50%, 3/15/11, Ser.
B.................... 1,427,296
Aa 1,000 6.50%, 6/15/14, Ser.
E.................... 1,025,070
New York St. Hsg. Fin.
Agcy. Rev.,
Multifamily Hsg.,
Aa 1,000 7.05%, 8/15/24, Ser.
A.................... 1,027,270
St. Univ. Constr.,
Aaa 1,000(D) 8.10%, 11/1/10, Ser.
A.................... 1,144,490
Aaa 3,600@ 8.00%, 5/1/11, Ser.
A.................... 4,368,672
Svc. Contract,
Aaa 2,000(D) 7.375%, 9/15/21, Ser.
A.................... 2,311,860
New York St. Local
Gov't.
Assistance Corp.,
Ser. B
A 2,000 5.625%, 4/1/13......... 1,869,840
A 4,400 5.50%, 4/1/21.......... 3,922,468
New York St. Med. Care
Facs. Fin. Agcy.
Rev.,
Booth Silvercrest &
Kings
Brook Hosp.,
Aa 2,750 7.60%, 2/15/29, Ser. A,
F.H.A................ 3,016,255
Buffalo Gen. Hosp. &
Nursing Home,
AAA* 2,000(D) 7.60%, 2/15/08, Ser. C,
F.H.A................ 2,241,900
Ellis & Ira Davenport
Hosp.,
Aa 1,495 8.00%, 2/15/28, Ser. B,
F.H.A................ 1,651,990
</TABLE>
B-168 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
New York St. Med. Care
Facs. Fin. Agcy.
Rev.,
Good Samaritian Hosp.,
F.H.A.,
Aa $ 3,500 7.625%, 2/15/23, Ser.
A.................... $ 3,835,405
Hosp. & Nursing Home,
F.H.A.,
A* 2,180 8.625%, 2/15/06, Ser.
C.................... 2,261,946
Aa 1,000(D) 7.70%, 2/15/25, Ser.
A.................... 1,159,190
Long Island Coll.
Hosp., F.H.A.,
Aa 3,000 8.00%, 2/15/08, Ser.
B.................... 3,301,620
AAA* 4,000 8.50%, 1/15/22, Ser.
A.................... 4,308,920
Mental Hlth. Svcs.,
Ser. A,
Aaa 2,185(D) 7.50%, 8/15/07......... 2,500,558
Baa1 815 7.50%, 8/15/07......... 882,979
Aaa 365(D) 7.75%, 8/15/11......... 423,553
Baa1 135 7.75%, 8/15/11......... 148,640
Aaa 3,135(D) 7.50%, 2/15/21......... 3,587,757
Baa1 1,165 7.50%, 2/15/21......... 1,269,326
St. Francis Hosp.,
F.G.I.C.,
Aaa 2,350 7.60%, 11/1/08, Proj.
A.................... 2,616,208
New York St. Mtge.
Agcy. Rev.,
Homeowner Mtge.,
Aa 3,525 7.50%, 4/1/16, Ser.
EE2.................. 3,748,732
Aa 1,620 6.875%, 4/1/17, Ser.
8A................... 1,650,634
Aa 3,145@ 8.05%, 10/1/21......... 3,318,132
New York St. Mun. Bond
Bank Agcy., Spec.
Proj. Rev.,
A+* 3,000 6.75%, 3/15/11, Ser.
A.................... 3,104,370
New York St. Pwr. Auth.
Rev. & Gen. Purp.,
Aa 2,000 6.75%, 1/1/18, Ser.
Y.................... 2,090,360
Aa 1,000 6.25%, 1/1/23.......... 1,001,280
New York St. Thrwy.
Auth. Gen. Rev.,
5.50%, 1/1/23,Ser. A,
F.G.I.C.............. 1,451,216
Aaa 1,600
New York St. Urban Dev.
Corp.
Rev., Correctional
Cap. Facs.,
Baa1 10,000 Zero Coupon, 1/1/08.... 4,345,100
Aaa 6,350 5.25%, 1/1/14,
F.S.A................ 5,694,934
Baa1 2,960 5.25%, 1/1/21.......... 2,486,341
Niagara Falls Bridge
Comn.,
Aaa $ 3,000(D) 6.125%, 10/1/19,
F.G.I.C.............. $ 3,245,520
Toll Bridge Sys. Rev.,
Aaa 2,350 5.25%, 10/1/21,
F.G.I.C.............. 2,039,354
Niagara Frontier Trans.
Auth. Arpt. Rev.,
Greater Buffalo Intl.
Arpt.,
Aaa 2,700 6.125%, 4/1/14,
A.M.B.A.C............ 2,686,095
Oneida Herkimer Solid
Waste Mgmt. Auth.,
Solid Waste Sys.
Rev.,
Baa 3,000 6.75%, 4/1/14.......... 3,031,380
Port Auth. of New York
& New Jersey,
A1 5,100 7.125%, 6/1/25, Ser.
69................... 5,588,019
A1 1,000 7.25%, 8/1/25, Ser.
70................... 1,085,070
A1 3,000 5.375%, 3/1/28......... 2,671,620
Puerto Rico Comnwlth.,
Gen. Oblig.,
Aaa 4,000 7.00%, 7/1/10,
A.M.B.A.C............ 4,487,960
Pub. Impvt. Ref.,
Aaa 1,250 7.00%, 7/1/10.......... 1,402,487
Puerto Rico Elec. Pwr.
Auth. Rev.,
Baa1 2,400 6.125%, 7/1/08, Ser.
S.................... 2,480,184
Puerto Rico Hsg. Fin.
Auth. Rev.,
Multifamily Mtge.,
AA* 1,995 7.50%, 4/1/22.......... 2,076,496
Puerto Rico Tel. Auth.
Rev.,
7.184%, 1/25/07, Ser.
Aaa 7,875@ I, M.B.I.A.,......... 7,382,812
Suffolk Cnty. Ind. Dev.
Agcy., Southwest Swr.
Sys. Rev., F.G.I.C.,
Aaa 1,000 6.00%, 2/1/07.......... 1,024,580
Aaa 1,000 4.75%, 2/1/09.......... 868,220
Suffolk Cnty. Wtr.
Auth.,
Waterworks Rev.,
Aaa 5,160 6.00%, 6/1/09,
M.B.I.A.............. 5,245,346
Aaa 250 5.00%, 6/1/17,
M.B.I.A.............. 211,500
5.25%, 6/1/17, Ser. A,
Aaa 1,110(D) A.M.B.A.C.............. 1,107,380
</TABLE>
B-169 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Triborough Bridge &
Tunl. Auth. Rev.,
Aaa $ 2,035(D) 7.50%, 1/1/15, Ser.
M.................... $ 2,245,582
Aaa 2,500(D) 6.00%, 1/1/20, Ser.
R.................... 2,617,950
Virgin Islands Pub.
Fin. Auth. Rev.,
Hwy. Trans. Trust
Fund,
BBB* 2,500 7.70%, 10/1/04......... 2,732,175
NR 2,550 7.25%, 10/1/18, Ser.
A.................... 2,630,631
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys.,
NR 2,300 8.50%, 1/1/10, Ser.
A.................... 2,526,688
------------
Total long-term
investments
(cost
$322,325,026)........ 336,538,714
------------
SHORT-TERM INVESTMENTS--1.6%
New York City Gen.
Oblig.,
VMIG1 3,100 3.20%, 9/1/94, Ser. A,
F.R.D.D.............. 3,100,000
New York City Ind. Dev.
Agcy., Spec. Fac.
Rev.,
Japan Airlines,
F.R.D.D.,
A1* 2,500 3.30%, 9/1/94, Ser.
91................... 2,500,000
------------
Total short-term
investments
(cost $5,600,000).... 5,600,000
------------
Total Investments--98.9%
(cost $327,925,026;
Note 4).............. $342,138,714
Other assets in excess
of
liabilities--1.1%.... 3,645,978
------------
Net Assets--100%....... $345,784,692
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of this 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.
* Standard & Poor's rating.
** Issuer in default, non-income producing
security.
@ Pledged as initial margin on financial futures
contracts.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-170 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $327,925,026)................................................ $ 342,138,714
Cash..................................................................................... 248,699
Interest receivable...................................................................... 4,469,823
Receivable for Series shares sold........................................................ 263,716
Deferred expenses and other assets....................................................... 10,467
---------------
Total assets......................................................................... 347,131,419
---------------
Liabilities
Payable for Series shares reacquired..................................................... 625,138
Dividends payable........................................................................ 289,151
Management fee payable................................................................... 146,728
Distribution fee payable................................................................. 142,156
Due to broker - variation margin......................................................... 14,562
Deferred trustees' fees.................................................................. 1,010
Accrued expenses......................................................................... 127,982
---------------
Total liabilities........................................................................ 1,346,727
---------------
Net Assets............................................................................... $ 345,784,692
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 295,236
Paid-in capital in excess of par....................................................... 331,843,528
---------------
332,138,764
Accumulated net realized loss on investments........................................... (572,604)
Net unrealized appreciation on investments............................................. 14,218,532
---------------
Net assets, August 31, 1994............................................................ $ 345,784,692
---------------
---------------
Class A:
Net asset value and redemption price per share
($13,660,690 / 1,166,759 shares of beneficial interest issued and outstanding)....... $11.71
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $12.07
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($331,981,953 / 28,344,685 shares of beneficial interest issued and outstanding)..... $11.71
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($142,049 / 12,129 shares of beneficial interest issued and outstanding)............. $11.71
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-171
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................ $ 22,542,861
------------
Expenses
Management fee...................... 1,820,106
Distribution fee--Class A........... 13,454
Distribution fee--Class B........... 1,752,818
Distribution fee--Class C........... 25
Transfer agent's fees and
expenses............................ 200,000
Custodian's fees and expenses....... 130,000
Reports to shareholders............. 90,000
Registration fees................... 35,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Insurance expense................... 7,000
Trustees' fees...................... 3,375
Miscellaneous....................... 11,002
------------
Total expenses.................... 4,088,280
------------
Net investment income................. 18,454,581
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 41,440
Financial futures transactions...... (57,494)
------------
(16,054)
------------
Net change in unrealized
appreciation/depreciation on:
Investments......................... (25,216,409)
Financial futures contracts......... 4,844
------------
(25,211,565)
------------
Net loss on investments............... (25,227,619)
------------
Net Decrease in Net Assets
Resulting from Operations............. $ (6,773,038)
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ----------------------------
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income............... $ 18,454,581 $ 18,305,266
Net realized gain
(loss) on investment
transactions......... (16,054) 8,650,226
Net change in
unrealized
appreciation/depreciation
of investments....... (25,211,565) 13,853,347
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations........... (6,773,038) 40,808,839
------------ ------------
Dividends from net
investment income (Note
1)
Class A.............. (734,832) (504,683)
Class B.............. (17,719,575) (17,800,583)
Class C.............. (174) --
------------ ------------
(18,454,581) (18,305,266)
------------ ------------
Series share transactions
(Note 5)
Net proceeds from
shares sold.......... 41,684,512 56,310,026
Net asset value of
shares issued in
reinvestment of
dividends............ 11,015,273 10,865,791
Cost of shares
reacquired............. (52,115,672) (41,780,067)
------------ ------------
Net increase in net
assets from Series
share transactions... 584,113 25,395,750
------------ ------------
Total increase
(decrease)............. (24,643,506) 47,899,323
Net Assets
Beginning of year........ 370,428,198 322,528,875
------------ ------------
End of year.............. $345,784,692 $370,428,198
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-172
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The 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.
The Series invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities or securities the Series intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Series may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this
B-173
<PAGE>
agreement, PMF has responsibility for all investment advisory services and
supervises the subadviser's performance of such services. PMF has entered into a
subadvisory agreement with The Prudential Investment Corporation (``PIC''); PIC
furnishes investment advisory services in connection with the management of the
Fund. PMF pays for the cost of the subadviser's services, the compensation of
officers of the Fund, occupancy and certain clerical and bookkeeping costs of
the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $166,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $336,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$138,000 for the services of PMFS. As of August 31, 1994, 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 Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $173,466,474 and $171,186,994, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1994 was $327,953,225 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $14,185,489 (gross unrealized
appreciation--$20,970,868, gross unrealized depreciation--$6,785,379).
For federal income tax purposes, the Series had a capital loss carryforward
as of August 31, 1994 of approximately $15,700 which expires in 1999. Such
carryforward is after utilization of approximately $512,600 to offset the
Series' net taxable gains recognized in the year ended August 31, 1994.
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 will elect to treat net capital losses of approximately $531,600
incurred in the ten month period ended August 31, 1994 as having been incurred
in the following fiscal year.
At August 31, 1994, the Series sold 2 financial futures contracts on the U.S.
Treasury Bond Index expiring in September 1994 and December 1994, respectively.
The value at disposition of such contracts is $4,187,031. The value of
B-174
<PAGE>
such contracts on August 31, 1994 was $4,182,187, thereby resulting in an
unrealized gain of $4,844.
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 commencing in or about February, 1995.
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,
1994 and 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
---------- ------------
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
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold.................. 629,556 $ 7,599,542
Shares issued in reinvestment
of
dividends.................. 25,616 309,097
Shares reacquired............ (227,933) (2,765,199)
---------- ------------
Net increase in shares
outstanding................ 427,239 $ 5,143,440
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
<S> <C> <C>
---------- ------------
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)
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 4,042,874 $ 48,710,484
Shares issued in reinvestment
of
dividends................... 877,265 10,556,694
Shares reacquired............. (3,254,011) (39,014,868)
---------- ------------
Net increase in shares
outstanding................. 1,666,128 $ 20,252,310
---------- ------------
---------- ------------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994* 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
---------- ------------
---------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-175
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B Class C
-------------------------------------------------- ---------------------------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 22, August 1,
1990(D) 1994(D)(D)
Year Ended August 31, Through Year Ended August 31, Through
----------------------------------- August 31, ---------------------------------------------------- August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
------- ------- ------ ------ ------------ -------- -------- -------- -------- -------- ----------
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $12.54 $ 11.75 $11.08 $10.62 $10.81 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $ 10.88 $11.74
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ----------
Income
from
investment
operations
Net
investment
income... .67 .70 .71 .72 .42 .62 .65 .66 .67 .65 .04
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... (.83) .79 .67 .46 (.19) (.83) .79 .67 .46 (.26) (.03)
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ----------
Total
from
investment
oper-
ations... (.16) 1.49 1.38 1.18 .23 (.21) 1.44 1.33 1.13 .39 .01
Less
dividends
Dividends
from
net
investment
income... (.67) (.70) (.71) (.72) (.42) (.62) (.65) (.66) (.67) (.65) (.04)
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ----------
Net asset
value,
end of
period... $ 11.71 $ 12.54 $11.75 $11.08 $10.62 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $11.71
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ----------
------- ------- ------ ------ ------ -------- -------- -------- -------- -------- ----------
TOTAL
RETURN#:... (1.38)% 13.06% 12.73% 11.49% 2.03% (1.77)% 12.61% 12.32% 10.96% 3.73% 0.06%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end of
period
(000)... $13,661 $11,821 $6,057 $2,729 $1,174 $331,982 $358,607 $316,472 $293,942 $313,606 $ 142
Average
net
assets
(000)... $13,454 $ 8,755 $4,024 $1,579 $ 588 $350,564 $330,823 $303,016 $295,285 $332,580 $ 42
Ratios to
average
net
assets:##
Expenses,
including
distribution
fees... .74% .74% .74% .71% .78%* 1.14% 1.14% 1.14% 1.11% 1.17% 1.62%*
Expenses,
excluding
distribution
fees... .64% .64% .64% .61% .68%* .64% .64% .64% .61% .67% .87%*
Net
investment
income... 5.46% 5.78% 6.19% 6.61% 6.41%* 5.06% 5.38% 5.79% 6.21% 6.10% 5.17%*
Portfolio
turnover... 49% 44% 45% 78% 127% 49% 44% 45% 78% 127% 49%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends. Total returns for periods of less than a full year are not annualized.
## Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares are
not necessarily comparable to that of Class A or B shares and are not necessarily indicative of future
ratios.
</TABLE>
See Notes to Financial Statements.
B-176
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New York Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 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, 1994, 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 17, 1994
B-177
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NEW YORK MONEY MARKET SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
Amherst Ind. Dev. Agcy.
Rev.,
Gen. Accident Ins.,
3.15%, 11/1/94, Ser.
A-1+* $ 3,100 85, S.E.M.O.T........ $ 3,100,000
Babylon Ind. Dev. Agcy.
Rev.,
Res. Rec. Rev.,
2.95%, 9/1/94, Ser. 89,
A-1+* 200 F.R.D.D.............. 200,000
Erie Cnty.,
4.75%, 8/15/95,
MIG1 3,000 R.A.N................ 3,020,622
Guilderland Ind. Dev. Agcy. Rev.,
Northeastern Ind'l. Park,
2.95%, 9/7/94, Ser.
P-1 1,500 93A, F.R.W.D......... 1,500,000
Islip Cnty.,
4.50%, 8/22/95, Ser.
NR 2,500 94, B.A.N............ 2,506,870
Monroe Cnty., Ind. Dev.
Agcy. Rev.,
Gen. Accident Ins.
Co.,
3.95%, 3/1/95, Ser. 84,
A-1+* 7,000 S.E.M.O.T............ 7,000,000
Granite Bldg.,
2.85%, 9/7/94, Ser. 92,
P-1 2,550 F.R.W.D.............. 2,550,000
Monroe Cnty., Pub.
Impvt.,
3.10%, 9/1/94, Ser.
VMIG1 3,675 BT-92, F.R.W.D....... 3,675,000
Mt. Pleasant Ind. Dev. Agcy. Rev.,
Poll. Ctrl. Rev.,
Gen. Motors Corp. Proj.,
3.10%, 9/7/94,
VMIG2 6,095 F.R.W.D.............. 6,095,000
New York City Bankers
Trust,
3.10%, 9/1/94, Ser.
VMIG1 10,000 B-79, F.R.W.D........ 10,000,000
New York City Gen.
Oblig.,
Ser. 95B, R.A.N.,
3.234%, 9/1/94,
MIG1 6,900 F.R.M.I.N............ 6,900,000
3.25%, 9/7/94,
MIG1 5,000 F.R.W.I.N............ 5,000,000
New York City Hsg. Dev. Corp.,
E. 17th St. Property,
3.20%, 9/1/94, Ser.
A-1* 4,400 93A, F.R.D.D......... 4,400,000
New York City Hsg. Dev. Corp.,
James Tower Proj.,
3.15%, 9/7/94, Ser.
A-1* $ 3,300 94A, F.R.W.D......... $ 3,300,000
Related E. 96th St.
Proj.,
3.00%, 9/1/94, Ser.
VMIG1 13,500 90A, F.R.W.D......... 13,500,000
New York City Ind. Dev.
Agcy. Rev.,
Japan Airlines,
3.30%, 9/1/94, Ser. 91,
A-1+* 24,100 F.R.D.D.............. 24,100,000
Viola Bakeries,
3.00%, 9/7/94, Ser. 90,
VMIG1 2,750 F.R.W.D.............. 2,750,000
New York City Trust for
Cultural Research,
Carnegie Hall,
3.15%, 9/7/94, Ser. 85,
VMIG1 3,075 F.R.W.D.............. 3,075,000
New York St. Dorm. Auth. Rev.,
2.85%, 9/12/94, Ser.
A-1+* 3,127 89A, T.E.C.P......... 3,127,000
Highland Cmnty. Dev.,
3.00%, 9/7/94, Ser.
VMIG1 3,250 94A, F.R.W.D......... 3,250,000
Mem. Sloan Kettering, T.E.C.P.,
2.85%, 9/1/94, Ser.
VMIG1 8,200 89C.................. 8,200,000
2.85%, 9/13/94, Ser.
VMIG1 5,400 89A.................. 5,400,000
Rockefeller Univ.,
3.25%, 9/7/94, Ser.
Aaa 12,000 91A, F.R.W.D......... 12,000,000
Soc. of New York
Hosps.,
3.00%, 9/20/94, Ser.
VMIG1 10,930 91, T.E.C.P.......... 10,930,000
St. Francis Center
at the Knolls,
3.15%, 9/1/94,
VMIG1 4,700 F.R.D.D.............. 4,700,000
New York St. Energy
Res. & Dev. Auth.,
Long Island Ltg. Co.
Proj.,
A.N.N.M.T.,
2.85%, 11/1/94, Ser.
VMIG1 4,000 93B.................. 4,000,000
3.00%, 3/1/95, Ser.
VMIG1 4,000 85B.................. 4,000,000
</TABLE>
B-178 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (Note 1)
<C> <C> <S> <C>
New York St. Energy
Res. & Dev. Auth.,
New York St. Elec. & Gas Co.,
2.80%, 9/1/94,
A-1+* $ 4,000 T.E.C.P.............. $ 4,000,000
2.80%, 12/1/94, Ser.
A-1+* 4,500 84A, A.N.N.M.T....... 4,500,000
2.95%, 12/7/94, Ser.
VMIG1 3,500 94C, T.E.C.P......... 3,500,000
Niagara Mohawk Pwr.
Corp., F.R.D.D.,
3.20%, 9/1/94, Ser.
P-1 2,600 85B.................. 2,600,000
3.30%, 9/1/94, Ser.
P-1 6,100 86A.................. 6,100,000
New York St. Environ.
Facs. Corp., Gen.
Elec. Corp.,
3.25%, 11/9/94, Ser.
P-1 1,400 92A, T.E.C.P......... 1,400,000
New York St. Gen.
Oblig.,
2.80%, 9/8/94, Ser. P,
P-1 5,500 T.E.C.P.............. 5,500,000
New York St. Hsg. Fin.
Auth.,
Liberty View Apts.,
3.00%, 9/7/94, Ser.
VMIG1 5,400 85A, F.R.W.D......... 5,400,000
New York St. Job Dev.
Auth., F.R.M.D.,
2.75%, 9/1/94, Ser.
VMIG1 1,810 84D.................. 1,810,000
2.75%, 9/1/94, Ser.
VMIG1 1,145 84E.................. 1,145,000
2.75%, 9/1/94, Ser.
VMIG1 1,665 84F.................. 1,665,000
2.90%, 9/1/94, Ser.
VMIG1 1,265 86C.................. 1,265,000
Niagara Cnty. Ind. Dev.
Agcy. Rev., Gen.
Abrasive Treibacher,
3.25%, 9/7/94, Ser. 91,
P-1 4,600 F.R.W.D.............. 4,600,000
Oswego Cnty. Ind. Dev.
Agcy. Rev., Phillip
Morris Co.,
3.05%, 9/7/94, Ser. 92,
P-1 6,300 F.R.W.D.............. 6,300,000
Port Auth. of New York
& New Jersey,
Kiac Partners,
F.R.W.D.,
2.95%, 9/7/94, Ser.
VMIG1 $ 6,200 3-2.................. $ 6,200,000
2.95%, 9/7/94, Ser.
VMIG1 4,500 3-3.................. 4,500,000
Spec. Oblig. Rev.,
3.30%, 9/1/94, Ser. 1,
VMIG1 6,100 F.R.D.D.............. 6,100,000
3.125%, 9/6/94, Ser.
93-1,
NR 12,000 F.R.W.D.............. 12,000,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
2.90%, 9/7/94, Ser. 85,
VMIG1 4,900 F.R.W.D.............. 4,900,000
Sayville Union Free
Sch. Dist.,
4.50%, 6/8/95,
MIG1 3,800 B.A.N................ 3,822,479
Smithtown Central Sch.
Dist.,
4.00%, 6/23/95,
MIG1 8,440 T.A.N................ 8,452,936
St. Lawrence Cnty. Ind.
Dev. Agcy. Rev.,
Clarkson Univ. Proj.,
3.15%, 9/1/94, Ser. 90,
VMIG1 3,000 F.R.W.D.............. 3,000,000
Syracuse,
4.00%, 6/16/95, B.A.N.,
NR 4,188 T.R.A.N.............. 4,200,666
Yates Cnty. Ind. Dev. Agcy. Rev.,
Clearplass Containers Inc.,
3.10%, 9/1/94, Ser.
A-1* 1,575 92A, F.R.W.D......... 1,575,000
------------
Total Investments--97.7%
(amortized cost--
$262,815,573**)...... 262,815,573
Other assets in excess
of
liabilities--2.3%.... 6,257,624
------------
Net Assets--100%....... $269,073,197
------------
------------
</TABLE>
B-179 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.M.I.N.--Floating Rate (Monthly) Index Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.R.W.I.N.--Floating Rate (Weekly) Index Note #.
R.A.N.--Revenue Anticipation Note.
S.E.M.O.T.--Semi-Annual Optional Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of 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.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-180 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at amortized cost which approximates market value........................... $ 262,815,573
Cash..................................................................................... 71,164
Receivable for investments sold.......................................................... 15,206,882
Receivable for Series shares sold........................................................ 1,338,195
Interest receivable...................................................................... 954,941
Other assets............................................................................. 6,725
---------------
Total assets......................................................................... 280,393,480
---------------
Liabilities
Payable for investments purchased........................................................ 7,000,000
Payable for Series shares reacquired..................................................... 3,962,481
Accrued expenses and other liabilities................................................... 120,871
Management fee payable................................................................... 117,428
Dividends payable........................................................................ 102,621
Distribution fee payable................................................................. 15,872
Deferred trustees' fees.................................................................. 1,010
---------------
Total liabilities.................................................................... 11,320,283
---------------
Net Assets............................................................................... $ 269,073,197
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................... $ 2,690,732
Paid-in capital in excess of par....................................................... 266,382,465
---------------
Net assets, August 31, 1994............................................................ $ 269,073,197
---------------
---------------
Net asset value, offering price and redemption price per share ($269,073,197 /
269,073,197 shares
of beneficial interest issued and outstanding; unlimited number of shares
authorized)............................................................................ $1.00
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-181
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
---------------
<S> <C>
Income
Interest............................. $ 7,155,616
---------------
Expenses
Management fee....................... 1,402,462
Distribution fee..................... 350,615
Transfer agent's fees and expenses... 151,000
Custodian's fees and expenses........ 125,000
Reports to shareholders.............. 55,000
Registration fees.................... 32,000
Legal fees........................... 15,000
Audit fee............................ 10,000
Insurance expense.................... 8,500
Trustees' fees....................... 3,375
Miscellaneous........................ 4,695
---------------
Total expenses..................... 2,157,647
---------------
Net investment income.................. 4,997,969
---------------
Net Increase in Net Assets
Resulting from Operations.............. $ 4,997,969
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) -----------------------------
in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income................. $ 4,997,969 $ 4,821,146
------------- -------------
Net increase in net
assets resulting from
operations........... 4,997,969 4,821,146
------------- -------------
Dividends to
shareholders........... (4,997,969) (4,821,146)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from
shares sold.......... 956,452,031 1,012,741,172
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends............ 4,807,678 4,672,839
Cost of shares
reacquired............. (978,490,262) (980,895,234)
------------- -------------
Net increase (decrease)
in net assets from
Series share
transactions......... (17,230,553) 36,518,777
------------- -------------
Total increase
(decrease)............. (17,230,553) 36,518,777
Net Assets
Beginning of year........ 286,303,750 249,784,973
------------- -------------
End of year.............. $ 269,073,197 $ 286,303,750
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-182
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$131,000 for the services of PMFS. As of August 31, 1994, 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-183
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1994 1993 1992 1991 1990
------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains.............. .02 .02 .03 .04 .05
Dividends and distributions to shareholders............... (.02) (.02) (.03) (.04) (.05)
------------ -------- -------- -------- --------
Net asset value, end of year.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ -------- -------- -------- --------
------------ -------- -------- -------- --------
TOTAL RETURN#:............................................ 1.80% 1.80% 2.93% 4.37% 5.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................. $ 269,073 $286,304 $249,785 $236,361 $226,758
Average net assets (000).................................. $ 280,492 $275,640 $248,557 $245,494 $218,423
Ratios to average net assets:
Expenses, including distribution fee.................... .77% .75% .76% .79% .75%
Expenses, excluding distribution fee.................... .64% .63% .63% .66% .62%
Net investment income................................... 1.78% 1.75% 2.83% 4.23% 4.99%
- ---------------
# Total return includes reinvestment of dividends and distributions.
</TABLE>
See Notes to Financial Statements.
B-184
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, New York Money Market Series, including the
portfolio of investments, as of August 31, 1994, 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, 1994 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, 1994, 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 17, 1994
B-185
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
NORTH CAROLINA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--98.7%
Buncombe Cnty.,
Pub. Impvt. Bonds,
Aa $ 1,000(D) 6.90%, 3/1/09........... $ 1,096,830
Charlotte, Cert. of
Part., Conv. Fac.
Proj., A.M.B.A.C.,
Aaa 3,000 Zero Coupon, 12/1/09.... 1,185,780
Charlotte Wtr. & Swr.,
Aaa 1,500 6.20%, 6/1/17........... 1,539,990
Aaa 1,000 5.90%, 2/1/19........... 996,080
Cleveland Cnty.,
F.G.I.C.,
5.10%, 6/1/07, Ser.
Aaa 2,500 1993.................. 2,378,150
Coastal Regl. Mgmt.
Auth., Solid Waste
Sys.,
A 2,000 6.50%, 6/1/08........... 2,025,620
Craven No. Carolina,
Hlth. Care Facs. Rev.,
5.625%, 10/1/17,
Aaa 750 M.B.I.A............... 699,120
Dare Cnty., Util. Sys.
Rev.,
Aaa 500 5.75%, 6/1/14........... 482,785
Durham, Cert. of Part.,
Morgan St. Garage
Proj.,
AAA* 500(D) 8.00%, 7/1/06........... 553,135
Durham Cnty., Pub.
Impvt.,
Aaa 2,000 4.60%, 5/1/04........... 1,876,260
Fayetteville, Cert. of
Part.,
San. Swr. & Pub.
Impvt.,
A1 250 7.10%, 5/1/07........... 276,660
6.875%, 12/1/08,
Aaa 1,750 A.M.B.A.C............. 1,872,132
Gastonia, Gen. Oblig.,
Wtr. Sys. & St.
Impvt.,
5.25%, 4/1/09,
Aaa 1,625 F.G.I.C............... 1,525,582
Greenville, Utility
Rev.,
A1 1,000 6.00%, 9/1/16........... 977,330
Guilford Cnty., Pub.
Impvt.,
Aa1 1,500 5.40%, 4/1/09........... 1,449,990
Martin Cnty. Ind. Facs.
& Poll. Ctrl. Fin.
Auth. Rev.,
Weyerhaueser Co.
Proj.,
A2 550 8.50%, 6/15/99.......... 623,508
Mecklenberg Cnty., Pub.
Impvt.,
Aaa $ 1,000 5.00%, 4/1/08........... $ 936,170
Aaa 1,250(D) 6.25%, 1/1/09........... 1,350,200
New Hanover Cnty. Hosp.
Rev., Regl. Med. Ctr.
Proj.,
4.75%, 10/1/23,
Aaa 1,600 A.M.B.A.C............. 1,260,432
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev.,
Aaa 1,995 6.50%, 1/1/18, E.T.M.... 2,152,026
A 1,005 6.50%, 1/1/18........... 1,007,281
7.625%, 1/1/22, Ser. A,
A.M.B.A.C............. 1,104,350
Aaa 1,000(D)
Aaa 650(D) 6.00%, 1/1/26........... 648,200
A 400 6.00%, 1/1/26........... 372,328
No. Carolina Edl. Facs.
Fin.
Agcy. Rev.,
Davidson Coll. Proj.,
8.10%, 12/1/12, Ser.
AAA* 1,000(D)@ A..................... 1,095,330
No. Carolina Hsg. Fin.
Agcy.,
Multi-family Mtge.
Rev., F.H.A.,
8.875%, 7/1/08, Ser.
Aa 45 C..................... 47,271
Aa 245 9.75%, 7/1/20, Ser. A... 252,997
Sngl. Fam. Mtge. Rev.,
Aa 960 7.80%, 3/1/21, Ser. G... 1,037,655
No. Carolina Med. Care
Comn., Hlth. Care
Facs. Rev.,
Stanley Mem. Hosp.
Proj.,
Baa1 650 7.80%, 10/1/19.......... 695,123
No. Carolina Med. Care
Comn., Hosp. Rev.,
Annie Pen Mem. Hosp.
Proj.,
Baa 1,000 7.50%, 8/15/21.......... 1,046,770
Baptist Hosp. Proj.,
Aa 1,000 6.00%, 6/1/22........... 948,260
Carolina Medicorp Proj.,
7.875%, 5/1/15, Ser.
Aaa 750(D) A..................... 823,995
Aa 1,500 6.00%, 5/1/21........... 1,423,560
Duke Univ. Hosp. Proj.,
8.625%, 6/1/10, Ser.
Aa 595(D) 85A................... 624,334
</TABLE>
B-186 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
No. Carolina Med. Care
Comn.,
Hosp. Rev.,
Mem. Mission Hosp. Inc.
Proj.,
A1 $ 800 9.10%, 10/1/08.......... $ 849,176
Mercy Hosp. Proj.,
9.625%, 8/1/15, Ser.
AAA* 670(D) 85.................... 715,895
Presbyterian Hlth. Svcs.
Proj.,
Aa 500 5.50%, 10/1/20.......... 447,310
Rex Hosp. Proj.,
A1 1,750 6.25%, 6/1/17........... 1,751,137
Scotland Mem. Hosp.,
8.625%, 10/1/11, Ser.
Baa 1,000(D) 88.................... 1,157,530
No. Carolina Mun. Pwr.
Agcy., No. 1 Catawba
Elec. Rev.,
A 1,000 5.25%, 1/1/09........... 919,450
6.00%, 1/1/10,
Aaa 2,500 M.B.I.A............... 2,519,725
8.12%, 1/1/12,
Aaa 2,000(D)(D) M.B.I.A............... 1,745,000
7.625%, 1/1/14,
Aaa 615(D) A.M.B.A.C............. 679,175
7.625%, 1/1/14,
Aaa 135 A.M.B.A.C............. 148,515
Aaa 760(D) 8.50%, 1/1/17, Ser. B... 815,419
Aaa 920(D) 7.00%, 1/1/18........... 960,710
A 80 7.00%, 1/1/18........... 82,383
Northern Hosp. Dist. Surry Cnty.
Hlth. Care Facs. Rev.,
No. Carolina Hosp.,
Aaa 700(D) 9.75%, 10/1/12.......... 754,523
Baa 1,500 7.875%, 10/1/21......... 1,599,960
Piedmont Triad Arpt.
Auth.,
5.00%, 7/1/16,
Aaa 1,000 M.B.I.A............... 856,320
Puerto Rico Aqueduct &
Swr. Auth. Rev.,
7.875%, 7/1/17, Ser.
Baa 2,000 A..................... 2,218,600
Puerto Rico Comnwlth.,
5.50%, 7/1/13,
Aaa 1,750 M.B.I.A............... 1,667,067
Gen. Oblig.,
8.382%, 7/1/20,
Aaa 1,300(D)(D) F.S.A................. 1,218,750
Pub. Impvt. Ref.,
5.40%, 7/1/07,
Aaa 1,250 M.B.I.A............... 1,244,163
Puerto Rico Hsg. Fin.
Corp., Bank & Fin.
Agcy.,
Baa 1,000 5.125%, 12/1/05......... 937,620
Puerto Rico Hsg. Fin.
Corp.,
Sngl. Fam. Mtge. Rev.,
7.80%, 10/15/21, Ser. A,
G.N.M.A............... $ 161,431
Aaa $ 155
7.65%, 10/15/22, Ser.
1-B, G.N.M.A.......... 766,448
Aaa 740
Puerto Rico Ind. Med. & Environ.
Poll. Ctrl. Facs.,
Upjohn Co. Proj.,
Aa3 500 7.50%, 12/1/23.......... 553,115
Puerto Rico Tel. Auth.
Rev., Ser. I,
M.B.I.A.,
Aaa 1,000(D)(D) 7.184%, 1/25/07......... 937,500
Robeson Cnty.,
Aaa 500(D) 7.80%, 6/1/09........... 559,965
Rutherford Cnty., Cert.
of Part., Pub. Facs.
Proj.,
6.20%, 6/1/18,
Aaa 1,000 F.G.I.C............... 1,004,850
Union Cnty. Wtr. & Swr.,
Solid Waste Rev.,
A1 850 6.50%, 4/1/07........... 900,507
Univ. of No. Carolina at
Chapel Hill, Pkg. Sys.
Rev., Ser. B,
A1 850 6.80%, 6/1/06........... 905,004
A1 500 6.00%, 6/1/08........... 508,785
Virgin Islands Pub. Fin.
Auth. Rev., Hwy.
Trans. Trust Fund,
BBB* 1,050 7.50%, 10/1/96.......... 1,107,204
7.25%, 10/1/18, Ser.
NR 700 A..................... 722,134
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
7.75%, 10/1/06, Ser.
NR 460 91.................... 502,978
Virgin Islands Wtr. & Pwr. Auth.,
Wtr. Sys. Rev.,
NR 600 8.50%, 1/1/10, Ser. A... 659,136
Wake Cnty. Hosp. Rev.,
5.125%, 10/1/26,
Aaa 1,500 M.B.I.A............... 1,261,980
Winston Salem,
Sngl. Fam. Mtge. Rev.,
A1 500 8.00%, 9/1/07........... 523,010
-----------
Total long-term
investments
(cost $68,975,538).... 70,747,709
-----------
</TABLE>
B-187 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
SHORT-TERM INVESTMENTS--0.4%
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.
F.R.W.D.,
2.90%, 9/7/94, Ser. 85
VMIG1 $300 (cost $300,000)....... $ 300,000
-----------
Total Investments--99.1%
(cost $69,275,538; Note
4).................... 71,047,709
Other assets in excess
of
liabilities--0.9%..... 665,998
-----------
Net Assets--100%........ $71,713,707
-----------
-----------
</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.H.A.--Federal Housing Administration.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of Floating Rate Demand Notes is
considered to be the later of the next date on
which the security can be redeemed at par, or
the next date on which the rate of interest is
adjusted.
* Standard & Poor's Rating.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
@ 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.
B-188 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $69,275,538)................................................. $71,047,709
Interest receivable...................................................................... 1,212,733
Receivable for investments sold.......................................................... 748,743
Receivable for Fund shares sold.......................................................... 44,417
Deferred expenses and other assets....................................................... 2,067
---------------
Total assets........................................................................... 73,055,669
---------------
Liabilities
Bank overdraft........................................................................... 68,973
Payable for investments purchased........................................................ 979,983
Payable for Fund shares reacquired....................................................... 131,876
Dividends payable........................................................................ 59,833
Accrued expenses......................................................................... 38,695
Due to Manager........................................................................... 30,471
Due to Distributors...................................................................... 29,715
Due to broker - variation margin......................................................... 1,406
Deferred Trustees' fees.................................................................. 1,010
---------------
Total liabilities...................................................................... 1,341,962
---------------
Net Assets............................................................................... $71,713,707
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 64,837
Paid-in capital in excess of par....................................................... 70,044,569
---------------
70,109,406
Accumulated net realized loss on investments........................................... (177,870)
Net unrealized appreciation on investments............................................. 1,782,171
---------------
Net assets, August 31, 1994............................................................ $71,713,707
---------------
---------------
Class A:
Net asset value and redemption price per share ($2,255,872 / 204,020 shares of
beneficial interest issued and outstanding).......................................... $11.06
Maximum sales charge (3% of offering price)............................................ .34
---------------
Maximum offering price to public....................................................... $11.40
---------------
Class B:
Net asset value, offering price and redemption price per share ($69,447,600 / 6,278,792
shares of
beneficial interest issued and outstanding).......................................... $11.06
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share ($10,235 / 925 shares of
beneficial interest issued and outstanding).......................................... $11.06
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-189
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................. $ 4,670,468
-----------
Expenses
Management fee....................... 378,373
Distribution fee--Class A............ 2,067
Distribution fee--Class B............ 368,035
Custodian's fees and expenses........ 84,000
Transfer agent's fees and expenses... 40,000
Reports to shareholders.............. 29,000
Registration fees.................... 23,000
Legal fees........................... 15,000
Audit fee............................ 10,500
Trustees' fees....................... 3,375
Miscellaneous........................ 5,822
-----------
Total expenses....................... 959,172
-----------
Net investment income.................. 3,711,296
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.............. 269,989
Financial futures contract
transactions......................... 6,075
-----------
276,064
-----------
Net change in unrealized
appreciation/depreciation on:
Investments.......................... (5,446,522)
Financial futures contracts.......... 10,000
-----------
(5,436,522)
-----------
Net loss on investments................ (5,160,458)
-----------
Net Decrease in Net Assets
Resulting from Operations.............. $(1,449,162)
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) in ---------------------------
Net Assets 1994 1993
------------ -----------
<S> <C> <C>
Operations
Net investment income.... $ 3,711,296 $ 3,592,693
Net realized gain on
investment
transactions........... 276,064 1,658,002
Net change in unrealized
appreciation/depreciation
of investments......... (5,436,522) 2,485,116
------------ -----------
Net increase (decrease)
in net assets resulting
from operations........ (1,449,162) 7,735,811
------------ -----------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A................ (109,844) (73,032)
Class B................ (3,601,431) (3,519,661)
Class C................ (21) --
------------ -----------
(3,711,296) (3,592,693)
------------ -----------
Distributions from net
realized gains
Class A................ (33,123) --
Class B................ (1,379,190) --
------------ -----------
(1,412,313) --
------------ -----------
Series share transactions
(Note 5)
Net proceeds from shares
sold................... 9,251,532 15,956,884
Net asset value of shares
issued in reinvestment
of dividends and
distributions.......... 2,641,848 1,678,716
Cost of shares
reacquired............... (10,898,454) (8,977,505)
------------ -----------
Net increase in net
assets from Series
share transactions..... 994,926 8,658,095
------------ -----------
Total increase
(decrease)............... (5,577,845) 12,801,213
Net Assets
Beginning of year.......... 77,291,552 64,490,339
------------ -----------
End of year................ $ 71,713,707 $77,291,552
------------ -----------
------------ -----------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-190
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss 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-191
<PAGE>
Reclassification of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital and increase accumulated net realized
gain on investments by $6,943 compared to amounts previously reported through
August 31, 1993. Net investment income, net realized gains and net assets were
not affected by this change.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $26,500 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $64,600 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended August 31, 1994, the Series incurred fees of approximately
$28,900 for the services of PMFS. As of August 31, 1994, approximately $2,400 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $14,116,995 and $12,203,398, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, as
of August 31, 1994 net unrealized appreciation of investments, including
short-term investments, for federal income tax purposes is $1,772,171 (gross
unrealized appreciation--$3,180,286; gross unrealized depreciation--$1,408,115).
B-192
<PAGE>
At August 31, 1994, the Series sold 50 financial futures contracts on the
Municipal Bond Index expiring in September 1994. The value at disposition of
such contracts is $467,500. The value of such contracts on August 31, 1994 was
$457,500, thereby resulting in an unrealized gain of $10,000.
The Fund will elect to treat net capital losses of approximately $107,146
incurred in the ten month period ended August 31, 1994 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 commencing in or about February 1995.
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 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
--------- -----------
<S> <C> <C>
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
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold...................... 84,457 $ 975,980
Shares issued in reinvestment of
dividends...................... 4,050 47,104
Shares reacquired................ (21,713) (250,645)
--------- -----------
Net increase in shares
outstanding.................... 66,794 $ 772,439
--------- -----------
--------- -----------
<CAPTION>
Class B Shares Amount
--------- -----------
<S> <C> <C>
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
--------- -----------
--------- -----------
Year ended August 31, 1993:
Shares sold...................... 1,288,829 $14,980,904
Shares issued in reinvestment of
dividends...................... 140,597 1,631,612
Shares reacquired................ (753,654) (8,726,860)
--------- -----------
Net increase in shares
outstanding.................... 675,772 $ 7,885,656
--------- -----------
--------- -----------
<CAPTION>
Class C
<S> <C> <C>
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
--------- -----------
--------- -----------
</TABLE>
- ------------------
* Commencement of offering of Class C shares.
B-193
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------------ -----------------------------
January 22,
1990(D)
Year Ended August 31, through Year Ended August 31,
-------------------------------------------- August 31, -----------------------------
1994 1993 1992 1991 1990 1994 1993 1992
------ ------ ------- ------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $12.04 $11.37 $10.86 $10.45 $10.63 $ 12.05 $ 11.37 $ 10.86
------ ------ ------ ------ ------ ------- ------- -------
Income from investment
operations
Net investment income......... .61 .65 .67 .67 .41 .56 .60 .62
Net realized and unrealized
gain (loss) on investment
transactions................ (.76) .67 .51 .41 (.18) (.77) .68 .51
------ ------ ------- ------ ------ ------- ------- -------
Total from investment
operations................ (.15) 1.32 1.18 1.08 .23 (.21) 1.28 1.13
------ ------ ------- ------ ------ ------- ------- -------
Less distributions
Dividends from net investment
income...................... (.61) (.65) (.67) (.67) (.41) (.56) (.60) (.62)
Distributions from net
realized gains.............. (.22) -- -- -- -- (.22) -- --
------ ------ ------ ------ ------- ------- ------- -------
Total distributions......... (.83) (.65) (.67) (.67) (.41) (.78) (.60) (.62)
------ ------ ------ ------ ------- ------- ------- -------
Net asset value, end of
period...................... $11.06 $12.04 $11.37 $10.86 $10.45 $ 11.06 $ 12.05 $ 11.37
------ ------ ------ ------ ------ ------- ------- -------
------ ------ ------ ------ ------ ------- ------- -------
TOTAL RETURN#................. (1.35)% 11.99% 11.12% 10.63% 2.09% (1.82)% 11.62% 10.64%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $2,256 $1,777 $ 917 $ 362 $ 58 $69,448 $75,515 $63,573
Average net assets (000)...... $2,067 $1,316 $ 612 $ 246 $ 32 $73,606 $67,997 $60,751
Ratios to average net
assets:##
Expenses, including
distribution fees......... .88% .87% .91% .99% 1.00%* 1.28% 1.27% 1.31%
Expenses, excluding
distribution fees......... .78% .77% .81% .89% .90%* .78% .77% .81%
Net investment income....... 5.31% 5.55% 5.90% 6.24% 6.24%* 4.89% 5.18% 5.58%
Portfolio turnover............ 17% 38% 36% 27% 24% 17% 38% 36%
<CAPTION>
Class C
----------
August 1,
1994(D)(D)
through
August 31,
1991 1990 1994
------- ------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.45 $ 10.65 $11.09
------- ------- ----------
Income from investment
operations
Net investment income......... .63 .64 .04
Net realized and unrealized
gain (loss) on investment
transactions................ .41 (.20) (.03)
------- ------- ----------
Total from investment
operations................ 1.04 .44 .01
------- ------- ----------
Less distributions
Dividends from net investment
income...................... (.63) (.64) (.04)
Distributions from net
realized gains.............. -- -- --
------- ------- ----------
Total distributions......... (.63) (.64) (.04)
------- ------- ----------
Net asset value, end of
period...................... $ 10.86 $ 10.45 $11.06
------- ------- ----------
------- ------- ----------
TOTAL RETURN#................. 10.17% 4.28% .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $59,875 $57,429 $ 10
Average net assets (000)...... $59,071 $56,745 $ 5
Ratios to average net
assets:##
Expenses, including
distribution fees......... 1.39% 1.38% 1.67%*
Expenses, excluding
distribution fees......... .89% .89% .92%*
Net investment income....... 5.88% 5.96% 5.06%*
Portfolio turnover............ 27% 24% 17%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a
purchase of shares on the first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for periods of less than a full year are not
annualized.
## Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares
are not necessarily comparable to that of Class A or B shares and are not necessarily indicative of
future ratios.
</TABLE>
See Notes to Financial Statements.
B-194
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, North Carolina Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, North Carolina Series, including the portfolio
of investments, as of August 31, 1994, 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, 1994 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, North Carolina Series, as of August 31, 1994, 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 17, 1994
B-195
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
OHIO SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--98.7%
Akron, Bath & Copley
Twnshps.,
Hosp. Dist. Rev.,
Childrens Hosp. Med.
Ctr.,
5.25%, 11/15/20,
Aaa $ 1,000 A.M.B.A.C............ $ 872,940
Summa Health Systems
Proj.,
5.75%, 11/15/08, Ser.
A 3,465 A.................... 3,321,930
Akron, Gen. Oblig.,
A 200 10.50%, 12/1/04........ 277,716
4.50%, 12/1/12,
Aaa 645 F.S.A................ 530,725
Allen Cnty. Wtr. & Swr.
Dist.,
7.80%, 12/1/08,
Aaa 1,000(D) A.M.B.A.C............ 1,131,150
Bellefontaine City Sch.
Dist., A.M.B.A.C.,
Aaa 495 Zero Coupon, 12/1/06... 252,227
Aaa 485 Zero Coupon, 12/1/07... 231,505
Aaa 485 Zero Coupon, 12/1/08... 216,519
Aaa 390 Zero Coupon, 12/1/09... 162,591
Aaa 390 Zero Coupon, 12/1/10... 152,201
Aaa 465 Zero Coupon, 12/1/11... 170,260
Berea City Sch. Dist.,
5.00%, 12/15/17,
Aaa 4,375 A.M.B.A.C............ 3,768,187
Carroll Cnty. Econ.
Dev. Rev., Great
Trail Lake Ctr.,
11.75%, 8/1/14,
NR 690 F.H.A................ 784,820
City of Toledo,
Aaa 1,000 6.10%, 12/1/14......... 998,730
Cleveland City Sch.
Dist.,
Gen. Oblig.,
Sch. Impvt., Ser. B,
F.G.I.C.,
Aaa 490 Zero Coupon, 6/1/05.... 273,454
Aaa 400 Zero Coupon, 6/1/06.... 209,512
Aaa 315 Zero Coupon, 6/1/07.... 154,611
Aaa 550 Zero Coupon, 12/1/08... 245,537
Columbus Citation Hsg.
Dev. Corp., Mtge.
Rev.,
7.625%, 1/1/22,
AA* 1,885(D) F.H.A................ 2,236,854
Columbus, Gen. Oblig.,
6.00%, 9/15/10, Ser.
Aa1 1,000(D) 1.................... 1,055,660
6.00%, 9/15/11, Ser.
Aa1 1,000(D) 1.................... 1,055,660
Mun. Arpt. No. 32,
Aa1 435 7.15%, 7/15/06......... 469,387
Columbus, Gen. Oblig.,
Swr. Impvt. No. 26,
Aa1 $ 2,000 6.00%, 9/15/09......... $ 2,025,060
Cuyahoga Cnty.,
Bldg. Impvt. Bond,
7.40%, 10/1/09, Ser.
NR 1,500(D) 83................... 1,670,055
Cuyahoga Cnty., Hosp.
Auth. Rev., Brentwood
Hosp.,
Baa1 1,600 9.625%, 11/1/14........ 1,704,144
Dayton Arpt. Rev.,
James M. Cox Int'l.
Arpt.,
8.25%, 1/1/16,
Aaa 3,500 A.M.B.A.C............ 3,746,750
Dayton, Gen. Oblig.,
7.00%, 12/1/07,
Aaa 480 M.B.I.A.............. 538,853
Dayton Wtr. Sys. Rev.,
Mtge. Ref.,
Aaa 600@(D) 10.25%, 12/1/10........ 655,452
Dublin City Sch. Dist.,
Franklin,
Delaware & Union Co.,
Zero Coupon, 12/1/05,
Aaa 1,000 A.M.B.A.C............ 540,080
East Cleveland Rev.,
Local Gov't. Fund
Notes,
NR 1,110 7.90%, 12/1/97......... 1,223,153
Franklin Cnty. Hosp.
Rev.,
A 1,550 5.875%, 12/1/13........ 1,412,608
Holy Cross Hlth. Sys.,
7.65%, 6/1/10, Ser. B,
Aaa 2,500(D) A.M.B.A.C............ 2,866,225
Gahanna Jefferson City
Sch. Dist., Gen.
Oblig.,
Zero Coupon, 12/1/09,
Aaa 445 A.M.B.A.C............ 185,521
Greene Cnty. Swr. Sys.
Rev.,
Zero Coupon, 12/1/08,
Aaa 450 A.M.B.A.C............ 200,894
Hamilton Cnty. Elec.
Sys. Mtge. Rev.,
8.00%, 10/15/22, Ser.
Aaa 3,000@(D) B, F.G.I.C........... 3,407,880
Hamilton Cnty. Gas Sys.
Rev.,
4.75%, 10/15/23, Ser.
Aaa 3,750 A, M.B.I.A........... 3,020,887
</TABLE>
B-196 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Hamilton Cnty. Swr.
Sys. Rev., Met. Swr.
Dist. of Greater
Cincinnati,
9.50%, 12/1/05, Ser.
Aaa $ 500(D) A.................... $ 546,510
Kettering Cnty., Gen.
Oblig.,
Aa 1,155(D) 7.30%, 12/1/06......... 1,312,923
Logan Hocking Local
Sch. Dist., Hocking,
Perry & Vinton Co.,
Gen. Oblig.,
Zero Coupon, 12/1/09,
Aaa 650 A.M.B.A.C............ 270,985
Loveland City Sch.
Dist.,
Gen. Oblig.,
A* 3,000 7.10%, 12/1/09......... 3,269,190
Lucas Cnty. Hosp. Rev.,
Toledo Hosp., Impvt.
& Ref., M.B.I.A.,
Aaa 2,000 5.00%, 11/15/13........ 1,750,840
Aaa 6,000 5.00%, 11/15/22........ 5,038,620
Miami Cnty. Hosp. Facs.
Rev.,
Upper Valley Med.
Ctr. Proj.,
6.50%, 5/1/21, Ser. A,
Aaa 500 M.B.I.A.............. 513,590
Montgomery Cnty. Swr.
Sys. Rev., Greater
Moraine, Beaver
Creek, F.G.I.C.,
Aaa 1,000 Zero Coupon, 9/1/05.... 550,540
Aaa 500 Zero Coupon, 9/1/07.... 242,020
Mount Vernon City Sch.
Dist., Gen. Oblig.,
F.G.I.C.,
Aaa 500 7.50%, 12/1/14......... 565,630
Aaa 1,000 5.85%, 12/1/19......... 975,420
Newark Ltd. Tax Gen.
Oblig., Wtr. Impvt.,
A.M.B.A.C.
Aaa 805 Zero Coupon, 12/1/06... 410,188
Ohio St. Air Quality
Dev. Auth. Rev.,
Poll. Ctrl.,
Cincinnati Gas &
Elec. Co.,
5.45%, 1/1/24, Ser. B,
Aaa 2,400 M.B.I.A.............. 2,178,840
Cleveland Co. Proj.,
8.00%, 12/1/13,
Aaa 2,500@ F.G.I.C.............. 2,902,650
Ohio St. Air Quality
Dev. Auth. Rev.,
Poll. Ctrl.,
Edison Proj.,
7.45%, 3/1/16, Ser. A,
Aaa $ 3,750 F.G.I.C.............. $ 4,163,737
Ohio St. Bldg. Auth.,
Columbus St. Bldg.
Proj.,
7.75%, 10/1/07, Ser.
A 750(D) A.................... 842,280
Das Data Ctr. Proj.,
A 615 6.00%, 10/1/08......... 628,468
St. Correctional Facs.,
8.00%, 8/1/06, Ser.
Aaa 600(D) A.................... 670,614
A 2,450 5.90%, 10/1/07......... 2,490,082
8.00%, 8/1/08, Ser.
Aaa 500(D) A.................... 558,845
Workers Comp.--W. Green
Bldg. A
A 1,175 4.75%, 4/1/14.......... 960,210
Ohio St. Higher Edl.
Fac. Comn. Rev.,
Case Western Resv.
Univ.,
Aa 1,410 6.25%, 10/1/16......... 1,426,807
7.70%, 10/1/18, Ser.
Aa 1,000 A.................... 1,094,880
6.50%, 10/1/20, Ser.
Aa 750 B.................... 778,853
Oberlin Coll.,
Aaa 1,000(D) 7.375%, 10/1/14........ 1,125,750
Aaa 500(D) 9.25%, 10/1/15......... 535,490
Univ. of Dayton Proj.,
5.80%, 12/1/19,
Aaa 750 F.G.I.C.............. 723,915
Ohio St. Mtge. Rev.,
8.15%, 8/1/17, Ser. A,
AAA* 3,500 F.H.A................ 3,895,570
Ohio St. Poll. Ctrl.
Rev.,
Standard Oil Co.,
A1 1,350 6.75%, 12/1/15......... 1,470,515
Ohio St. Univ., Gen.
Receipts,
5.75%, 12/1/09, Ser.
A1 1,500 A2................... 1,486,335
5.875%, 12/1/12, Ser.
A1 750 A1................... 729,480
Ohio St. Wtr. Dev.
Auth. Rev.,
7.50%, 12/1/08, Ser.
Aaa 1,200(D) I.................... 1,331,688
5.50%, 12/1/11,
Aaa 915 A.M.B.A.C............ 870,870
Ottawa Cnty. San. Sew.
Sys. Rev., Danbury
Proj.,
7.375%, 10/1/14,
Aaa 1,000(D) A.M.B.A.C............ 1,127,200
</TABLE>
B-197 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Oxford Hosp. Facs.
Rev.,
1st Mtge., McCullough
Hyde Mem.,
NR $ 1,445 8.00%, 5/1/17.......... $ 1,513,609
Pickerington Local Sch.
Dist., Gen. Oblig.,
A.M.B.A.C.,
Aaa 890 Zero Coupon, 12/1/08... 397,323
Aaa 935 Zero Coupon, 12/1/09... 389,801
Aaa 525 Zero Coupon, 12/1/13... 168,231
Puerto Rico Comnwlth.,
Aqueduct & Swr. Auth.
Rev.,
7.875%, 7/1/17, Ser.
Ba 1,000 A.................... 1,109,300
Gen. Oblig., M.B.I.A.,
8.344%, 7/1/08, Ser.
Aaa 1,000(D)(D) A.................... 1,012,500
Aaa 1,500 5.25%, 7/1/18.......... 1,356,435
Puerto Rico Pub. Bldgs.
Auth.,
Gtd. Pub. Ed. & Hlth.
Facs.,
Zero Coupon, 7/1/06,
Baa1 3,000 Ser. J............... 1,528,530
Rural Lorain Cnty. Wtr.
Auth. Res. Rev.,
7.70%, 10/1/08,
Aaa 2,000(D) A.M.B.A.C............ 2,248,760
Sandusky Cnty., Gen.
Oblig.,
6.25%, 12/1/19,
Aaa 500 M.B.I.A.............. 508,505
Scioto Cnty. Hosp. Fac.
Rev., Portsmouth
Proj.,
7.625%, 5/15/08, Ser.
B,
Aaa 2,290 M.B.I.A.............. 2,536,290
Shawnee St. Univ.,
Gen. Receipts,
6.00%, 6/1/14, Ser. B,
Aaa 500 A.M.B.A.C............ 498,225
Solon Sch. Dist., Gen.
Oblig.,
Graphic Laminating
Inc. Proj.,
Aa 2,000(D) 7.15%, 12/1/13......... 2,272,120
Student Loan Funding
Corp., Cincinnati
Rev., Ser. A,
A 1,400 7.20%, 8/1/03.......... 1,492,218
A 2,000 7.25%, 2/1/08.......... 2,087,980
Sugarcreek Local Sch.
Dist.,
Zero Coupon, 12/1/08,
Aaa 500 F.G.I.C.............. 223,215
Summit Cnty. Ind. Dev.
Rev., Century
Products, Gerber
Foods,
A2 $ 3,250 7.75%, 11/1/05......... $ 3,522,837
Tuscarawas Cnty. Hosp.
Fac. Rev., Union
Hosp. Proj., Ser. A,
Baa 450 6.375%, 10/1/11........ 435,659
Baa 1,250 6.50%, 10/1/21......... 1,149,012
Univ. of Cincinnati,
Gen. Receipts,
7.30%, 6/1/09, Ser.
Aaa 1,000(D) E1................... 1,100,940
7.00%, 6/1/11, Ser.
A1 1,000 L.................... 1,083,220
Univ. of Toledo,
Gen. Receipts,
7.70%, 6/1/18,
Aaa 1,000(D) M.B.I.A.............. 1,116,540
Virgin Islands Pub.
Fin. Auth. Rev., Hwy.
Trans. Trust Fund,
7.25%, 10/1/18, Ser.
NR 1,000 A.................... 1,031,620
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Prog.,
7.75%, 10/1/06, Ser.
NR 460 91................... 502,978
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
7.40%, 7/1/11, Ser.
NR 1,000 A.................... 1,044,600
Wtr. Sys. Rev.,
8.50%, 1/1/10, Ser.
NR 1,000 A.................... 1,098,560
Woodmore Indpt. Sch.
Dist., Gen. Oblig.,
A.M.B.A.C.,
Aaa 490 Zero Coupon, 12/1/05... 266,134
Aaa 480 Zero Coupon, 12/1/06... 244,584
Youngstown, Gen.
Oblig.,
6.125%, 12/1/14,
Aaa 300 M.B.I.A.............. 302,925
------------
Total Investments--98.7%
(cost $115,698,184;
Note 4).............. 121,451,924
Other assets in excess
of
liabilities--1.3%.... 1,572,576
------------
Net Assets--100%....... $123,024,500
------------
------------
</TABLE>
B-198 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
(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.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
@ Pledged as initial margin on financial futures
contracts.
* Standard & Poor's rating.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(D) Inverse floating rate bond. The coupon is
inversely indexed to a floating interest rate.
The rate shown is the rate at period end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-199 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $115,698,184)................................................ $ 121,451,924
Interest receivable...................................................................... 2,125,554
Receivable for Series shares sold........................................................ 140,182
Other assets............................................................................. 3,300
---------------
Total assets........................................................................... 123,720,960
---------------
Liabilities
Bank overdraft........................................................................... 252,301
Payable for Series shares reacquired..................................................... 160,863
Dividends payable........................................................................ 83,813
Accrued expenses......................................................................... 81,446
Management fee payable................................................................... 52,038
Distribution fee payable................................................................. 50,479
Due to broker-variation margin........................................................... 14,510
Deferred trustees' fees.................................................................. 1,010
---------------
Total liabilities...................................................................... 696,460
---------------
Net Assets............................................................................... $ 123,024,500
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 104,922
Paid-in capital in excess of par....................................................... 117,685,937
---------------
117,790,859
Accumulated net realized loss on investments........................................... (477,599)
Net unrealized appreciation on investments............................................. 5,711,240
---------------
Net assets, August 31, 1994............................................................ $ 123,024,500
---------------
---------------
Class A:
Net asset value and redemption price per share
($4,749,275 / 405,188 shares of beneficial interest issued and outstanding).......... $11.72
Maximum sales charge (3.0% of offering price).......................................... .36
---------------
Maximum offering price to public....................................................... $12.08
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($118,269,998 / 10,086,517 shares of beneficial interest issued and outstanding)..... $11.73
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($5,226.57 / 445.72 shares of beneficial interest issued and outstanding)............ $11.73
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-200
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................ $ 7,928,367
-----------
Expenses
Management fee...................... 630,490
Distribution fee--Class A........... 4,733
Distribution fee--Class B........... 606,826
Custodian's fees and expenses....... 106,000
Transfer agent's fees and
expenses............................ 80,000
Reports to shareholders............. 44,000
Registration fees................... 30,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Trustees' fees...................... 3,375
Miscellaneous....................... 8,856
-----------
Total expenses.................... 1,539,780
-----------
Net investment income................. 6,388,587
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions............. 513,514
Financial futures transactions...... 287,132
-----------
800,646
-----------
Net change in unrealized appreciation/depreciation
on:
Investments......................... (7,701,534)
Financial futures contracts......... (40,313)
-----------
(7,741,847)
-----------
Net loss on investments............... (6,941,201)
-----------
Net Decrease in Net Assets Resulting
from Operations....................... $ (552,614)
-----------
-----------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ----------------------------
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income................. $ 6,388,587 $ 6,034,400
Net realized gain on
investment
transactions......... 800,646 1,222,277
Net change in
unrealized
appreciation of
investments.......... (7,741,847) 5,311,037
------------ ------------
Net increase (decrease)
in net assets
resulting from
operations........... (552,614) 12,567,714
------------ ------------
Dividends from net
investment income (Note
1)
Class A.............. (258,026) (165,299)
Class B.............. (6,130,561) (5,869,101)
------------ ------------
(6,388,587) (6,034,400)
------------ ------------
Series share transactions
(Note 5)
Net proceeds from
shares
sold................. 16,655,835 21,565,565
Net asset value of
shares
issued in
reinvestment of
dividends............ 3,713,106 3,491,240
Cost of shares
reacquired............. (16,986,967) (9,300,053)
------------ ------------
Net increase in net
assets from Series
share transactions... 3,381,974 15,756,752
------------ ------------
Total increase
(decrease)............. (3,559,227) 22,290,066
Net Assets
Beginning of year........ 126,583,727 104,293,661
------------ ------------
End of year.............. $123,024,500 $126,583,727
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-201
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The 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. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-202
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $72,700 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $96,400 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994 the Series incurred fees of approximately $53,000
for the services of PMFS. As of August 31, 1994, approximately $4,000 of such
fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $30,071,941 and $25,048,220, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1994 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized appreciation of investments, including short-term
investments, for federal income tax purposes was $5,753,740 (gross unrealized
appreciation--$7,676,486; gross unrealized depreciation--$1,922,746).
For federal income tax purposes, the Series has a capital loss carryforward
as of August 31, 1994 of approximately $279,400 which expires in 1996. Such
carryforward is after utilization of approximately $772,000 to offset the
Series' net taxable gains recognized in the year ended August 31, 1994.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
At August 31, 1994 the Series sold 58 financial futures contracts on U.S.
Treasury Bonds which expire in September 1994. The value at disposition of such
contracts is $5,973,188. The value of such contracts on August 31,
B-203
<PAGE>
1994 was $6,015,688, thereby resulting in an unrealized loss of $42,500.
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 commencing in or about February 1995.
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 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
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
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 237,725 $ 2,875,262
Shares issued in reinvestment
of dividends................ 9,080 108,980
Shares reacquired............. (50,464) (609,662)
---------- ------------
Net increase in shares
outstanding................. 196,341 $ 2,374,580
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
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
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 1,561,093 $ 18,690,303
Shares issued in reinvestment
of dividends................ 282,692 3,382,260
Shares reacquired............. (731,090) (8,690,391)
---------- ------------
Net increase in shares
outstanding................. 1,112,695 $ 13,382,172
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold................... 446 $ 5,200
---------- ------------
---------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
B-204
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class C
------------------------------------------------------ Class B ----------
January 22, -------------------------------------------------- August 1,
1990(D) 1994(D)(D)
Year Ended August 31, Through Year Ended August 31, Through
--------------------------------------- August 31, -------------------------------------------------- August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER
SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $12.38 $11.69 $11.17 $10.71 $10.85 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 10.85 $11.75
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- ----------
Income
from
investment
operations
Net
investment
income... .66 .69 .70 .70 .47 .61 .65 .65 .65 .66 .05
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions... (.66) .69 .52 .46 (.14) (.65) .68 .52 .47 (.14) (.02)
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- ----------
Total
from
investment
oper-
ations. -- 1.38 1.22 1.16 .33 (.04) 1.33 1.17 1.12 .52 .03
Less
dividends
Dividends
from
net
investment
income... (.66) (.69) (.70) (.70) (.47) (.61) (.65) (.65) (.65) (.66) (.05)
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- ----------
Net
asset
value,
end
of
period $11.72 $12.38 $11.69 $11.17 $10.71 $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $11.73
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- ----------
------ ------ ------ ------ ------ -------- -------- -------- ------- ------- ----------
TOTAL
RETURN#:... (0.01)% 12.12% 11.26% 11.06% 2.58% (0.33)% 11.58% 10.79% 10.74% 4.87% 0.18%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000).. $4,749 $4,647 $2,095 $ 923 $ 462 $118,270 $121,937 $102,199 $92,572 $89,183 $5,227@
Average
net
assets
(000)... $4,733 $2,904 $1,289 $ 615 $ 289 $121,365 $110,053 $ 96,178 $90,437 $89,302 $1,752@
Ratios
to
average
net
assets:##
Expenses,
including
distri-
bution
fees... .84% .84% .81% .93% .96%* 1.24% 1.24% 1.21% 1.33% 1.32% 2.28%*
Expenses,
excluding
distri-
bution
fees... .74% .74% .71% .83% .86%* .74% .74% .71% .83% .84% 1.53%*
Net
investment
income... 5.45% 5.73% 6.34% 6.34% 6.51%* 5.05% 5.33% 5.73% 5.94% 6.08% 4.73%*
Portfolio
turnover... 20% 28% 37% 37% 24% 20% 28% 37% 37% 24% 20%
<FN>
- ---------------
* Annualized.
(D) Commencement of offering of Class A shares.
(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total return for periods of less than one full year are not annualized.
## Because of the events referred to in (D)(D) and the timing of such, the ratios for the Class C shares are
not necessarily comparable to that of Class A or B shares and are not necessarily indicative of future
ratios.
@ Figures are actual and are not rounded to the nearest thousand.
</TABLE>
See Notes to Financial Statements.
B-205
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Ohio Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Ohio Series, including the portfolio of
investments, as of August 31, 1994, 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, 1994 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Ohio Series, as of August 31, 1994, 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 17, 1994
B-206
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND Portfolio of Investments
PENNSYLVANIA SERIES August 31, 1994
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--97.0%
Allegheny Cnty. Arpt.
Rev.,
Greater Pittsburgh
Int'l. Arpt.,
F.S.A.,
6.60%, 1/1/04, Ser.
Aaa $ 1,000 A.................... $ 1,081,510
Aaa 1,230 5.625%, 1/1/23......... 1,113,322
Allegheny Cnty., Gen.
Oblig., M.B.I.A.,
7.30%, 12/1/10, Ser.
Aaa 1,500(D) C-37................. 1,685,625
Allegheny Cnty. Higher
Ed. Bldg.
Auth. Rev., Robert
Morris Coll.,
7.00%, 6/15/08,
Aaa 1,000 M.B.I.A.............. 1,068,280
Allegheny Cnty. Hosp.
Dev. Auth.
Rev., Magee Womens
Hosp., F.G.I.C.,
Aaa 2,000 Zero Coupon, 10/1/14... 566,560
Aaa 2,000 Zero Coupon, 10/1/16... 496,480
Aaa 2,000 Zero Coupon, 10/1/18... 433,540
Aaa 4,000 Zero Coupon, 10/1/19... 809,840
Presbyterian Univ.
Hosp.,
7.625%, 7/1/15, Ser. C,
Aaa 1,100 M.B.I.A.............. 1,217,282
West Penn. Hosp. Hlth.
Ctr. Proj.,
NR 2,000 8.50%, 1/1/20.......... 2,249,240
Allegheny Cnty.
Pennsylvania
Ind. Dev. Rev. USX
Proj.,
Baa3 4,500 6.70%, 12/1/20......... 4,502,925
Allegheny Cnty.
Residential Fin.
Auth.,
Mtge. Rev., G.N.M.A.,
9.00%, 6/1/17, Ser.
Aaa 460 F.................... 491,110
7.40%, 12/1/22, Ser.
Aaa 970 Q.................... 1,003,872
Allegheny Cnty. San.
Auth. Swr. Rev.,
F.G.I.C.,
Aaa 2,620 Zero Coupon, 12/1/05... 1,399,840
Zero Coupon, 6/1/06,
Aaa 1,640 Ser. A............... 839,598
Beaver Cnty. Ind. Dev.
Auth. Poll. Ctrl.
Rev.,
Ohio Edison Proj.,
7.75%, 9/1/24, Ser. A,
Aaa 1,150 F.G.I.C.............. 1,292,738
Berks Cnty. Ind. Dev.
Auth. Rev.,
Lutheran Home Proj.,
NR $ 1,500 6.875%, 1/1/23......... $ 1,462,410
Bethlehem Auth. Wtr.
Rev.,
5.20%, 11/15/21,
Aaa 3,000 M.B.I.A.............. 2,586,660
Bristol Twnshp. Sch.
Dist.,
Gen Oblig., M.B.I.A.,
6.625%, 2/15/12, Ser.
Aaa 1,500 A.................... 1,651,125
Bucks Cnty. Wtr. & Swr.
Auth. Rev.,
Neshaminy Interceptor
Sys.,
7.50%, 12/1/13,
Aaa 2,000(D) F.G.I.C.............. 2,213,260
Butler Cnty. Hosp.
Auth. Rev.,
North Hills, Passavant
Hosp.,
7.00%, 6/1/22,
AAA* 1,000 C.G.I.C.............. 1,059,490
Cambria Cnty.
Pennsylvania
Ser. A, F.G.I.G.,
Aaa 2,000 6.20%, 8/15/21......... 1,999,920
Chester Upland Sch.
Auth.,
6.375%, 9/1/21, Ser.
A* 1,000 A.................... 1,000,910
Dauphin Cnty. Gen.
Auth. Rev.,
Aaa 1,000 7.40%, 1/1/06, B.I.G... 1,076,190
Delaware Cnty. Auth.
Rev.,
Crozer Chester Med.
Ctr., M.B.I.A.,
7.15%, 12/15/05, Ser.
Aaa 2,550 ABC.................. 2,882,775
Villanova Univ.,
NR 1,000(D) 7.75%, 8/1/18.......... 1,122,270
Delaware Cnty. Ind.
Dev. Auth. Rev., Res.
Recovery Proj.,
8.10%, 12/1/13, Ser.
A1 2,000 A.................... 2,125,100
Delaware Cnty.
Pennsylvania Auth.
Univ. Rev.,
Villanova Univ.,
5.50%, 8/1/23,
Aaa 3,000 M.B.I.A.............. 2,707,920
Delaware River Jt. Toll
Bridge Comm. Rev.,
6.00%, 7/1/18,
Aaa 5,500 F.G.I.C.............. 5,464,965
</TABLE>
B-207 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Doylestown Hosp. Auth.
Rev.,
Pine Run Retirement,
7.20%, 7/1/23, Ser.
NR $ 1,180 A.................... $ 1,222,020
Emmaus Gen. Auth. Rev.,
Local Gov't. Bond,
B.I.G.,
8.00%, 5/15/18, Ser.
Aaa 1,000 B.................... 1,100,590
7.90%, 5/15/18, Ser.
Aaa 1,250 C.................... 1,383,250
7.90%, 5/15/18, Ser.
Aaa 2,000 E.................... 2,213,200
7.90%, 5/15/18, Ser.
Aaa 1,600 F.................... 1,770,560
Erie Higher Ed. Bldg.
Auth. Coll. Rev.,
Mercyhurst Coll. Proj.,
BBB* 1,000(D) 7.85%, 9/15/19......... 1,130,280
5.75%, 3/15/23, Ser.
BBB* 3,250 B.................... 2,908,360
Falls Twnshp. Hosp.
Auth. Rev.,
Delaware Valley Med.,
7.00%, 8/1/22,
AAA* 2,700 F.H.A................ 2,870,343
Guam Arpt. Auth. Rev.,
6.70%, 10/1/23, Ser.
BBB* 3,500 B.................... 3,520,090
Harrisburg Auth. Rev.,
Green Cnty. Prison
Proj.,
6.625%, 6/1/13,
Aaa 1,500 F.G.I.C.............. 1,618,365
Harrisburg Redev. Auth.
Rev.,
Cap. Impvt.,
7.875%, 11/2/16, Ser.
Aaa 900 A, F.G.I.C........... 972,000
Lancaster Cnty. Solid
Waste
Mgmt. Auth., Rev.,
Res. Rec. Sys.
A1 500 7.875%, 12/15/09....... 508,345
Res. Rec. Sys.
Landfill,
A1 750 7.75%, 12/15/04........ 774,120
Langhorne Manor Boro.
Higher Ed. & Hlth.
Auth Rev.,
Lower Bucks Hosp.,
Baa 3,275 7.35%, 7/1/22.......... 3,373,774
Latrobe Pennsylvania
Ind. Dev. Auth. Coll.
Rev.,
St Vincents Coll.
Proj.,
Baa1 1,800 6.75%, 5/1/14.......... 1,804,086
St. Vincent Coll.
Proj.,
Baa1 $ 1,500 6.75%, 5/1/24.......... $ 1,486,500
Lehigh Cnty. Gen.
Purpose Auth.
Revs., Horizon Hlth.
Sys. Inc.,
8.25%, 7/1/13, Ser.
NR 500 A.................... 635,810
8.25%, 7/1/13, Ser.
A+* 750(D) B.................... 826,148
St. Lukes Hosp. of
Bethlehem Proj.,
5.30%, 11/15/06,
Aaa 750 A.M.B.A.C............ 724,433
5.30%, 11/15/07,
Aaa 1,000 A.M.B.A.C............ 954,210
Lehigh Cnty. Ind. Dev.
Auth. Poll.
Ctrl. Rev.,
Pa. Pwr. & Lt. Co.,
9.375%, 7/1/15, Ser.
A2 1,300 A.................... 1,379,157
Luzerne Cnty. Ind. Dev.
Auth.
Exmpt. Facs. Rev., Gas
& Water,
Baa3 4,000 7.20%, 10/1/17......... 4,051,040
7.125%, 12/1/22, Ser.
Baa3 2,000 B.................... 2,027,940
Montgomery Cnty. Higher
Ed. & Hlth. Auth.
Hosp. Rev.,
Jeanes Hlth. Sys.
Proj.,
BBB* 4,000(D) 8.625%, 7/1/07......... 4,783,080
Montgomery Cnty. Ind.
Dev. Auth. Rev.,
Poll. Ctrl.,
Philadelphia Elec.,
Baa2 1,000 7.60%, 4/1/21.......... 1,040,740
Res. Recovery,
AA-* 2,000 7.50%, 1/1/12.......... 2,098,020
Montgomery Cnty. Redev.
Auth.,
Multi-family Hsg.,
6.50%, 7/1/25, Ser.
NR 3,000 A.................... 2,861,850
No. Huntingdon Twnshp.
Mun. Auth.,
Gtd. Swr. Rev.,
6.70%, 4/1/06,
Aaa 1,070 M.B.I.A.............. 1,133,376
Northampton Cnty.
Higher Ed.
Auth. Rev., Lehigh
Univ.,
7.10%, 11/15/09,
Aaa 1,500 M.B.I.A.............. 1,646,970
</TABLE>
B-208 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Northampton Cnty.
Higher Ed.
Auth. Rev.,
Moravian Coll.,
BBB-* $ 2,095 8.20%, 6/1/11.......... $ 2,375,541
Northampton Cnty. Ind.
Dev.
Auth. Rev., Citizens
Util. Co.,
AAA* 1,000 6.95%, 8/1/15.......... 1,044,570
Northeastern Hosp. &
Ed. Auth.
Coll. Rev.,
BBB* 1,500 6.00%, 7/15/18......... 1,406,070
Northumberland Cnty.
Ind. Dev.
Auth. Rev., Roaring
Creek Wtr.,
NR 1,500 6.375%, 10/15/23....... 1,361,640
Pennsylvania Hsg. Fin.
Agcy.,
Sngl. Fam. Mtge. Rev.,
Aa 1,050(D)(D) 8.769%, 4/1/25......... 918,750
Sngl. Fam. Mtge.,
8.10%, 10/1/10, Ser.
Aa 780 X.................... 810,030
7.60%, 4/1/16, Ser.
Aa 1,000 S.................... 1,059,230
Aa 2,930 7.80%, 10/1/20......... 3,072,544
8.15%, 4/1/24, Ser.
Aa 1,280 X.................... 1,331,341
Pennsylvania Ind. Auth.
Econ. Dev. Rev.,
7.00%, 1/1/11, Ser.
A 3,000(D) A.................... 3,362,100
Pennsylvania
Infrastructure
Investment Auth.
Rev.,
AA* 750 6.80%, 9/1/10.......... 791,160
Pennsylvania
Intergovernmental
Cooperation Auth.,
Spec.Tax Rev.,
5.60%, 6/15/15,
Aaa 4,000 M.B.I.A.............. 3,703,640
Baa 1,000(D) 6.80%, 6/15/22......... 1,101,300
Pennsylvania St. Gen.
Oblig., F.S.A.,
6.25%, 11/1/06, Ser.
Aaa 4,000 A.................... 4,160,720
Pennsylvania St. Higher
Edl. Facs. Auth.
Rev.,
Coll. & Univ. Rev.,
6.00%, 11/1/22, Ser.
BBB+* 2,000 B.................... 1,821,100
Drexel Univ.,
BBB* $ 2,500 6.375%, 5/1/17......... $ 2,416,925
Hahnemann Univ. Proj.,
7.20%, 7/1/09,
Aaa 1,500 M.B.I.A.............. 1,652,730
La Salle Univ.,
7.70%, 5/1/10,
Aaa 1,100 M.B.I.A.............. 1,224,465
Med. Coll. of
Pennsylvania,
8.375%, 3/1/11, Ser.
Baa1 355 A.................... 387,387
7.50%, 3/1/14, Ser.
Baa1 2,350 A.................... 2,432,767
St. Sys. Ser. J,
5.625%, 6/15/19,
Aaa 1,520 A.M.B.A.C............ 1,393,749
Thomas Jefferson Univ.,
6.625%, 8/15/09, Ser.
Aa 1,000 A.................... 1,052,420
8.00%, 1/1/18, Ser.
AAA* 1,250(D) A,................... 1,394,312
Pennsylvania St. Ind.
Dev. Auth. Rev.,
Econ. Dev.,
Aaa 4,250 5.50%, 1/1/14.......... 3,908,172
Pennsylvania St. Tpke.
Comn. Rev.,
7.625%, 12/1/17, Ser.
Aaa 1,375(D) D.................... 1,547,329
7.50%, 12/1/19, Ser.
Aaa 4,650(D) K.................... 5,282,260
Pennsylvania St. Univ.,
Gen. Oblig.,
A1 3,000 5.55%, 8/15/07......... 2,937,570
NR 1,000(D) 6.75%, 7/1/09.......... 1,096,310
Philadelphia Arpt.
Rev.,
Baa 2,000 9.00%, 6/15/15......... 2,142,720
Philadelphia Gas Wks.
Rev.,
7.20%, 6/15/98, Ser.
Baa1 500 13................... 534,990
7.30%, 6/15/99, Ser.
Baa1 625 13................... 673,350
7.70%, 6/15/11, Ser.
Baa1 215 13................... 249,363
6.375%, 7/1/14, Ser.
Baa1 1,000 14................... 997,100
7.70%, 6/15/21, Ser.
Aaa 3,430(D) 13................... 3,982,539
6.375%, 7/1/26, Ser.
Baa1 2,900 14................... 2,824,571
Philadelphia Hosps. &
Higher Ed. Fac. Auth.
Rev.,
Childrens' Hosp. Proj.,
5.00%, 2/15/21, Ser.
Aa 2,000 A.................... 1,656,080
Grad. Hlth. Systems,
A-* 1,000 7.00%, 8/15/12......... 1,033,220
7.00%, 8/15/17, Ser.
A-* 1,000 A.................... 1,032,480
Childrens' Seashore
House,
6.25%, 7/1/18, Ser.
Baa1 1,000 A.................... 913,520
Baa1 2,750 7.25%, 7/1/18.......... 2,811,600
</TABLE>
B-209 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Philadelphia Ind. Dev.
Auth. Rev.,
Inst. For Cancer
Research,
7.25%, 7/1/10, Ser.
AA-* $ 5,770 B.................... $ 6,204,539
Nat'l. Brd. Of Med.
Examiners Proj.,
A+* 5,000 6.75%, 5/1/12.......... 5,399,800
Philadelphia Mun. Auth.
Rev.,
5.625%, 11/15/14,
Aaa 2,000 F.G.I.C.............. 1,866,140
5.625%, 11/15/18,
Aaa 2,000 F.G.I.C.............. 1,835,540
Philadelphia Pkg. Auth.
Rev.,
Arpt. Pkg.,
7.375%, 9/1/18,
Aaa 2,200 A.M.B.A.C............ 2,411,662
Philadelphia
Pennsylvania
Sch. Dist. Ser. A
Aaa 1,710 5.85%, 7/1/09.......... 1,716,566
Philadelphia Redev.
Auth. Rev.,
Home Impvt. Loan,
7.375%, 6/1/03, Ser.
A 390 A.................... 408,685
7.40%, 6/1/08, Ser.
A 385 A.................... 393,224
Philadelphia Wtr. &
Swr. Rev.,
Zero Coupon, 10/1/02,
Aaa 7,900 Ser. 15, M.B.I.A..... 5,167,706
6.875%, 10/1/06, Ser.
Aaa 700 15, M.B.I.A.......... 749,532
5.25%, 6/15/23,
Aaa 4,375 M.B.I.A.............. 3,757,337
Pittsburgh Stadium Auth. Rev.,
7.50%, 10/15/01,
Aaa 500 F.G.I.C.............. 539,945
Pittsburgh Urban Redev.
Auth.,
Mtge. Rev.,
8.30%, 4/1/17, Ser.
A1 795 B.................... 859,252
Pottstown Boro. Swr. Auth. Rev.,
Zero Coupon, 11/1/03,
Aaa 1,200 F.G.I.C.............. 734,976
Puerto Rico Comnwlth.,
Zero Coupon, 7/1/08,
Aaa 3,340 M.B.I.A.............. 3,339,833
Pub. Impvt. Ref.,
5.40%, 7/1/07,
Aaa 2,500 M.B.I.A.............. 2,488,325
Aaa 720 7.00%, 7/1/10.......... 807,833
Puerto Rico Comnwlth.,
Gen. Oblig.,
7.00%, 7/1/10,
Aaa 3,030 A.M.B.A.C............ 3,399,630
Puerto Rico Comnwlth.,
Gen. Oblig.,
8.393%, 7/1/20, Ser. A,
Aaa $ 4,250(D)(D) F.S.A................ $ 3,984,375
Puerto Rico Elec. Pwr.
Auth. Pwr. Rev.
7.00%, 7/1/06, Ser.
Baa1 1,800 S.................... 2,014,038
Puerto Rico Hsg. Fin. Auth. Rev.,
Baa 750 5.125%, 12/1/05........ 703,215
Multifamily Mtge.,
AA* 835 7.50%, 4/1/22.......... 869,110
Sngl. Fam.,
Baa 1,000 5.25%, 12/1/06......... 934,660
Puerto Rico Hwy. &
Trans. Auth. Rev.,
6.625%, 7/1/18, Ser.
AAA* 1,540(D) T.................... 1,622,664
Puerto Rico Pub.
Impvt.,
Aaa 5,250(D)@ 7.70%, 7/1/20.......... 6,072,465
Baa1 1,100(D) 6.80%, 7/1/21.......... 1,232,055
Sayre Hlth. Care Facs. Auth. Rev.,
Cap. Asset Fin. Prog.,
7.70%, 12/1/13,
Aaa 500 A.M.B.A.C............ 563,215
7.625%, 12/1/15, Ser.
H-2,
Aaa 1,000 A.M.B.A.C............ 1,142,420
Scranton Pkg. Auth.
Rev.,
A+* 1,600 8.125%, 9/15/14........ 1,774,592
Scranton-Lackawanna
Hlth. & Welfare Auth.
Rev.,
Univ. Of Scranton
Proj.,
7.50%, 6/15/06, Ser.
A-* 1,000(D) C.................... 1,139,230
A-* 2,250 6.50%, 3/1/15.......... 2,239,875
Shaler Twnshp., Gen
Oblig.,
5.00%, 8/15/17, Ser. B,
Aaa 1,000 F.G.I.C.............. 844,360
So. Fork Mun. Auth.
Hosp. Rev.,
Lee Hosp. Proj.,
5.50%, 7/1/23, Ser.
A-* 2,500 A.................... 2,152,825
Swarthmore Boro. Gen.
Auth. Rev., Pa.
Coll.,
A-* 600(D) 7.25%, 9/15/10......... 673,392
Venango Cnty. Gen.
Oblig.,
5.25%, 7/15/18, Ser.
Aaa 2,265 B.................... 1,993,449
</TABLE>
B-210 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description(a) (Note 1)
<C> <C> <S> <C>
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Gas Tax,
BBB* $ 1,000 7.70%, 10/1/04......... $ 1,092,870
Ref. Matching Loan
Notes,
7.25%, 10/1/18, Ser.
NR 1,950 A.................... 2,011,659
Virgin Islands Terr.,
Hugo Ins. Claims Fund
Proj.,
NR 1,105 7.75%, 10/1/06......... 1,208,240
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
8.50%, 1/1/10, Ser.
NR 1,400 A.................... 1,537,984
Washington Cnty. Auth.
Lease Rev.,
Mun. Fac., Shadyside
Hosp.,
7.45%, 12/15/18,
Ser. C-1D,
Aaa 2,900(D) A.M.B.A.C............ 3,319,949
Washington Cnty. Hosp. Auth. Rev.,
Monongahela Valley Hosp.,
A 2,750 6.75%, 12/1/08......... 2,846,250
Washington Cnty. Ind.
Dev. Auth. Rev.,
Presbyterian Med.
Ctr.,
6.70%, 1/15/12,
AAA* 1,000 F.H.A................ 1,021,600
York Cnty. Solid Waste
&
Refuse Auth. Ind.
Dev. Rev.,
Res. Rec. Proj.,
8.20%, 12/1/14, Ser.
AA-* 1,000 C.................... 1,084,810
------------
Total long-term
investments
(cost
$248,637,780)........ 260,480,906
------------
SHORT-TERM INVESTMENTS--2.4%
Allegheny Cnty. Hosp.
Dev.
Auth. Rev.,
3.20%, 9/1/94, Ser. A,
VMIG1 300 F.R.W.D.............. 300,000
3.20%, 9/1/94, Ser. B,
VMIG1 2,100 F.R.W.D.............. 2,100,000
Emmaus Pennsylvania
Gen.
Auth. Rev.
Local Gov't. Sub.
B-7,
A-1* $ 1,000 3.15%, 9/7/94.......... $ 1,000,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank.,
2.90%, 9/7/94, Ser. 85,
VMIG1 600 F.R.W.D.,............ 600,000
Schuylkill Cnty. Ind.
Dev. Auth., F.R.D.D.,
3.30%, 9/1/94, Ser.
P1 2,300 85................... 2,300,000
------------
Total short-term
investments
(cost $6,300,000).... 6,300,000
------------
Total Investments--99.4%
(cost $254,937,780;
Note 4).............. 266,780,906
Other assets in excess
of
liabilities--0.6%.... 1,693,253
------------
Net Assets--100%....... $268,474,159
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note#.
F.R.W.D.--Floating Rate (Weekly) Demand Note#.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the
maturity date of 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.
* Standard & Poor's rating.
(D) Prerefunded issues are secured by escrowed cash
and/or direct U.S. guaranteed obligations.
(D)(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.
@ 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.
B-211 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1994
---------------
<S> <C>
Investments, at value (cost $254,937,780)................................................ $ 266,780,906
Cash..................................................................................... 127,413
Interest receivable...................................................................... 4,180,051
Receivable for investments sold.......................................................... 1,279,398
Receivable for Series shares sold........................................................ 290,082
Deferred expenses and other assets....................................................... 29,658
---------------
Total assets......................................................................... 272,687,508
---------------
Liabilities
Payable for investments purchased........................................................ 3,394,576
Payable for Series shares reacquired..................................................... 342,915
Dividends payable........................................................................ 224,250
Management fee payable................................................................... 114,034
Distribution fee payable................................................................. 110,445
Due to broker - variation margin......................................................... 26,119
Deferred Trustees' fees.................................................................. 1,010
---------------
Total liabilities.................................................................... 4,213,349
---------------
Net Assets............................................................................... $ 268,474,159
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................. $ 257,606
Paid-in capital in excess of par....................................................... 257,812,482
---------------
258,070,088
Accumulated net realized loss on investments........................................... (1,299,743)
Net unrealized appreciation on investments............................................. 11,703,814
---------------
Net assets, August 31, 1994............................................................ $ 268,474,159
---------------
---------------
Class A:
Net asset value and redemption price per share
($10,651,317 / 1,021,931 shares of beneficial interest issued and outstanding)....... $10.42
Maximum sales charge (3% of offering price)............................................ .32
---------------
Maximum offering price to public....................................................... $10.74
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($257,732,481 / 24,730,032 shares of beneficial interest issued and outstanding)..... $10.42
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($90,361 / 8,669 shares of beneficial interest issued and outstanding)............... $10.42
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-212
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest............................ $ 17,360,812
------------
Expenses
Management fee...................... 1,384,548
Distribution fee--Class A........... 10,315
Distribution fee--Class B........... 1,332,972
Transfer agent's fees and
expenses............................ 187,000
Custodian's fees and expenses....... 118,000
Reports to shareholders............. 56,000
Registration fees................... 36,000
Legal fees.......................... 15,000
Audit fee........................... 10,500
Trustee's fees...................... 3,375
Miscellaneous....................... 13,788
------------
Total expenses........................ 3,167,498
------------
Net investment income................. 14,193,314
------------
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain (loss) on:
Investment transactions............. 282,442
Financial futures transactions...... (290,241)
------------
(7,799)
------------
Net change in unrealized appreciation/depreciation
on:
Investments......................... (17,643,912)
Financial futures contracts......... (139,312)
------------
(17,783,224)
------------
Net loss on investments............... (17,791,023)
------------
Net Decrease in Net Assets Resulting
from Operations....................... $ (3,597,709)
------------
------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ---------------------------
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 14,193,314 $ 12,582,197
Net realized gain (loss)
on
investment
transactions.......... (7,799) 2,222,982
Net change in unrealized
appreciation/depreciation
of investments........ (17,783,224) 13,704,514
------------ ------------
Net increase (decrease)
in net
assets resulting from
operations............ (3,597,709) 28,509,693
------------ ------------
Dividends and
distributions (Note 1):
Dividends to
shareholders from
net investment income
Class A............... (569,122) (417,688)
Class B............... (13,624,192) (12,164,509)
------------ ------------
(14,193,314) (12,582,197)
------------ ------------
Distributions to
shareholders from net
realized gain on
investment
transactions
Class A............... (97,328) (23,310)
Class B............... (2,598,620) (813,755)
------------ ------------
(2,695,948) (837,065)
------------ ------------
Series share transactions
(Note 5)
Net proceeds from shares
sold.................. 46,954,314 65,604,598
Net asset value of
shares
issued in reinvestment
of dividends and
distributions......... 9,903,212 7,674,719
Cost of shares
reacquired.............. (40,990,785) (27,211,612)
------------ ------------
Net increase in net
assets
from Series share
transactions.......... 15,866,741 46,067,705
------------ ------------
Total increase
(decrease).............. (4,620,230) 61,158,136
Net Assets
Beginning of year......... 273,094,389 211,936,253
------------ ------------
End of year............... $268,474,159 $273,094,389
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-213
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Notes to Financial Statements
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
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 The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: The 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.
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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market conditions. Should market conditions move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Note 2. Agreements The Fund has a management
agreement with Prudential
B-214
<PAGE>
Mutual Fund Management, Inc. (``PMF''). Pursuant to this agreement, PMF has
responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with The Prudential Investment Corporation (``PIC''); PIC furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the cost of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B 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.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B distribution plans under which the distribution plans became
compensation plans, effective August 1, 1994. Prior thereto, the distribution
plans were reimbursement plans, under which PMFD and PSI were reimbursed for
expenses actually incurred by them up to the amount permitted under the Class A
and Class B Plans, respectively. The Fund is not obligated to pay any prior or
future excess distribution costs (costs incurred by the Distributors in excess
of distribution fees paid by the Fund or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
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, 1994.
PMFD has advised the Series that it has received approximately $126,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1994. 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, 1994, it
received approximately $365,000 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 Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1994, the Series incurred fees of approximately
$131,000 for the services of PMFS. As of August 31, 1994, approximately $11,000
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations includes certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1994 were $73,332,703 and $59,206,623, respectively.
The cost basis of investments for federal income tax purposes was
$254,970,360 and, accordingly, as of August 31, 1994 net unrealized appreciation
of investments, including short-term investments, for federal income tax
purposes is $11,810,546 (gross unrealized appreciation--$15,211,468; gross
unrealized depreciation--$3,400,922).
At August 31, 1994 the Series sold 95 financial futures contracts on the
Municipal Bond Index expiring September 1994. The value at disposition of such
contracts on August 31, 1994 was $8,553,188. The value of such contracts on
August 31, 1994 was $8,692,500 thereby resulting in an unrealized loss of
$139,312.
The Fund will elect to treat net capital losses of approximately $1,202,900
incurred in the ten month period ended August 31, 1994 as having been incurred
in the following 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
B-215
<PAGE>
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 commencing in or about February 1995.
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 August 31, 1993 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
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
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 398,287 $ 4,306,639
Shares issued in reinvestment
of
dividends and
distributions............... 22,903 247,493
Shares reacquired............. (147,976) (1,607,135)
---------- ------------
Net increase in shares
outstanding................. 273,214 $ 2,946,997
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
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
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 5,687,242 $ 61,297,959
Shares issued in reinvestment
of
dividends and
distributions............... 689,051 7,427,226
Shares reacquired............. (2,382,063) (25,604,477)
---------- ------------
Net increase in shares
outstanding................. 3,994,230 $ 43,120,708
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------
<S> <C> <C>
August 1, 1994* through
August 31, 1994:
Shares sold................... 8,669 $ 90,200
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
B-216
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class C
------------------------------------------------- Class B ----------
January 22, ------------------------------------------------------ August 1,
1990(D)(D) 1994(D)(D)(D)
Year Ended August 31, Through Year Ended August 31, Through
---------------------------------- August 31, ------------------------------------------------------ August 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- ----------
PER SHARE
OPERATING
PERFORMANCE:
Net
asset
value,
beginning
of
period... $ 11.21 $10.55 $ 9.96 $ 9.60 $ 9.83 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $10.44
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- ----------
Income
from
investment
operations:
Net
investment
income... .59 .62 .62 .62(D) .38(D) .55 .57 .58 .58(D) .61(D) .04
Net
realized
and
unrealized
gain
(loss)
on
investment
trans-
actions.. (.68) .70 .59 .39 (.23) (.68) .71 .58 .39 (.21) (.02)
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- --------
Total
from
investment
opera-
tions.. (.09) 1.32 1.21 1.01 .15 (.13) 1.28 1.16 .97 .40 .02
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- --------
Less
distributions:
Dividends
from
net
investment
income... (.59) (.62) (.62) (.62) (.38) (.55) (.57) (.58) (.58) (.61) (.04)
Distributions
from net
realized
gains... (.11) (.04) -- (.03) -- (.11) (.04) -- (.03) -- --
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- --------
Total
distri-
butions. (.70) (.66) (.62) (.65) (.38) (.66) (.61) (.58) (.61) (.61) (.04)
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- --------
Net
asset
value,
end
of
period.. $ 10.42 $11.21 $10.55 $ 9.96 $ 9.60 $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $10.42
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- --------
------- ------ ------ ------ ------------ -------- -------- -------- -------- -------- --------
TOTAL
RETURN#:... (.82)% 12.86% 12.44% 10.82% 1.43% (1.22)% 12.54% 11.92% 10.39% 4.08% .14%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end
of
period
(000)... $10,651 $9,342 $5,908 $3,521 $1,823 $257,732 $263,752 $206,028 $170,162 $150,824 $ 90
Average
net
assets
(000)... $10,315 $7,354 $4,439 $2,366 $ 977 $266,594 $229,955 $186,113 $146,591 $141,183 $ 1
Ratios
to
average
net
assets:##
Expenses,
including
distribution
fees... .75% .78% .81% .83%(D) .78%*(D) 1.15% 1.18% 1.21% 1.23%(D) 1.02%(D) 2.00%*
Expenses,
excluding
distribution
fees... .65% .68% .71% .74%(D) .68%*(D) .65% .68% .71% .74%(D) .53%(D) 1.25%*
Net
investment
income... 5.52% 5.69% 5.99% 6.32%(D) 6.51%*(D) 5.11% 5.29% 5.59% 5.94%(D) 6.05%(D) 8.51%*
Portfolio
turnover... 22% 13% 25% 62% 37% 22% 13% 25% 62% 37% 22%
<FN>
- ---------------
* Annualized.
(D) Net of expense subsidy/management fee waiver.
(D)(D) Commencement of offering of Class A shares.
(D)(D)(D) Commencement of offering of Class C shares.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of
shares on the first day and a sale on the last day of each period reported and includes reinvestment dividends
and distributions. Total returns for periods of less than a full year are not annualized.
## Because of the events referred to in (D)(D)(D) and the timing of such, the ratios for the Class C shares are
not necessarily comparable to that of Class A or B shares and are not necessarily indicative of future ratios.
</TABLE>
See Notes to Financial Statements.
B-217
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Pennsylvania Series
We have audited the accompanying statement of assets and liabilities of
Prudential Municipal Series Fund, Pennsylvania Series, including the portfolio
of investments, as of August 31, 1994, 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, 1994 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, 1994, 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 17, 1994
B-218
