<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON NOVEMBER 2, 1995
SECURITIES ACT REGISTRATION NO. 2-91216
INVESTMENT COMPANY ACT REGISTRATION NO. 811-4023
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 32 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 33 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL MUNICIPAL SERIES FUND
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER SHARE* PRICE** FEE
<S> <C> <C> <C> <C>
Shares of beneficial interest,
par value $.01 per share..... indefinite*** N/A N/A N/A
Shares of beneficial interest,
par value $.01 per share..... 9,212,919 $9.31 $85,772,277 $100
<FN>
* Computed under Rule 457(d) on the basis of the offering price per share on
the close of business on October 25, 1995, calculated by averaging the
offering prices of the classes (if any) of each series, which offering
prices on the close of business on October 25, 1995 were: $11.96 (Arizona
Series), $1.00 (Connecticut Money Market Series), $10.59 (Florida Series),
$11.81 (Georgia Series), $12.69 (Hawaii Income Series), $11.16 (Maryland
Series), $12.18 (Massachusetts Series), $1.00 (Massachusetts Money Market
Series), $12.44 (Michigan Series), $12.21 (Minnesota Series), $1.00 (New
Jersey Money Market Series), $11.48 (New Jersey Series), $1.00 (New York
Money Market Series), $12.44 (New York Series), $11.75 (North Carolina
Series), $12.47 (Ohio Series), and $11.02 (Pennsylvania Series).
** Registrant elects to calculate the maximum aggregrate offering price
pursuant to Rule 24e-2. $2,389,530,504 of shares was redeemed during the
fiscal year ended August 31, 1995. $2,304,048,227 of shares was used for
reductions pursuant to paragraph (c) of Rule 24f-2 during the fiscal year
ended August 31, 1995. $85,482,277 of shares is the amount of redeemed
shares used for reduction for this amendment.
*** Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company
Act of 1940. The Rule 24f-2 Notice for the Registrant's most recent fiscal
year ended August 31, 1995 was filed on October 27, 1995.
</TABLE>
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- --------------------------------------------------------------------------- ------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page..................................................... Cover Page
Item 2. Synopsis....................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information................................ Fund Expenses; Financial Highlights; How the
Fund Calculates Performance
Item 4. General Description of Registrant.............................. Cover Page; Fund Highlights; How the Fund
Invests; General Information
Item 5. Management of the Fund......................................... Financial Highlights; How the Fund is Managed
Item 6. Capital Stock and Other Securities............................. Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................... Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase....................................... Shareholder Guide; How the Fund Values its
Shares; General Information
Item 9. Pending Legal Proceedings...................................... Not Applicable
PART B
Item 10. Cover Page..................................................... Cover Page
Item 11. Table of Contents.............................................. Table of Contents
Item 12. General Information and History................................ General Information; Organization and
Capitalization
Item 13. Investment Objectives and Policies............................. Investment Objectives and Policies; Investment
Restrictions
Item 14. Management of the Fund......................................... Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities............ Not Applicable
Item 16. Investment Advisory and Other Services......................... Manager; Distributor; Custodian, Transfer and
Dividend Disbursing Agent and Independent
Accountants
Item 17. Brokerage Allocation and Other Practices....................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities............................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Purchase and Redemption of Fund Shares;
Being Offered................................................ Shareholder Investment Account; Net Asset Value
Item 20. Tax Status..................................................... Distributions and Tax Information
Item 21. Underwriters................................................... Distributor
Item 22. Calculation of Performance Data................................ Performance Information
Item 23. Financial Statements........................................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this
Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(CONNECTICUT MONEY MARKET SERIES)
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PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Connecticut Money Market Series)
(the "Series") is one of fourteen 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 November 1, 1995, 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 fourteen 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 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 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, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 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 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.
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
(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.......................................................... .331%
---
Total Fund Operating Expenses (Before Waiver)........................... .956%
---
---
</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 $53 $117
The above example is based on restated data for the Series' fiscal year ended 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 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, 1995,
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 .125% and .581%, respectively, of the Series' average net assets. See
"How the Fund is Managed-- Manager--Fee Waivers."
</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(A)
----------------------------------------------------- THROUGH
1995 1994 1993 1992 AUGUST 31, 1991
----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains (c)...... .032 .020 .022 .034 .003
Dividends and distributions to shareholders........... (.032) (.020) (.022) (.034) (.003)
----------- ----------- ----------- ----------- -----------------
Net asset value, end of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
----------- ----------- ----------- ----------- -----------------
----------- ----------- ----------- ----------- -----------------
TOTAL RETURN (D):..................................... 3.16% 2.02% 2.20% 3.42% 0.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $ 62,867 $ 54,302 $ 57,794 $ 40,480 $10,904
Average net assets (000).............................. $ 57,103 $ 60,594 $ 53,152 $ 33,964 $ 6,730
Ratios to average net assets (c):
Expenses, including distribution fee................ .581% .542% .387% .125% .125%(b)
Expenses, excluding distribution fee................ .456% .417% .262% .00% .00%(b)
Net investment income............................... 3.17% 1.99% 2.17% 3.20% 4.42%(b)
<FN>
- --------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return 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,
1995:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $1.000650466
Value of hypothetical account at beginning of period........... 1.000000000
------------
Base period return............................................. $0.000650466
------------
------------
CURRENT YIELD (.000650466 X (365/7))+.......................... 3.39%
EFFECTIVE ANNUAL YIELD, assuming daily compounding+............ 3.45%
TAX-EQUIVALENT CURRENT YIELD (3.39% DIVIDED BY (1 -
42.32%))+..................................................... 5.88%
<FN>
- --------------
+After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax-equivalent yield would have been 3.02%, 3.07% and 5.24%,
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, 1995 was 54 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 FOURTEEN 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
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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 11.25% in 1995.
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. The State
Comptroller's monthly report as of October 1995 estimates that the State's
budget is facing a General Fund shortfall of approximately $34 million. The
adopted budget for 1996-1997 anticipated a modest surplus of $0.2 million.
Furthermore, defense spending cuts and slow employment growth 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. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
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
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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 Series intends to comply with applicable state blue sky laws
restricting the Series' investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of its average net assets, net of fee waiver, were .581%. 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, 1995, the Series paid a
management fee of .125 of 1% of the Series' average net assets after waiver. See
"Fee Waivers" below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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.
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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
Effective November 1, 1993, PMF agreed to waive 75% of its management fee.
During the fiscal year ended August 31, 1995, PMF voluntarily waived $214,138 of
its management fee (.375 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, 1995, 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. The Fund records all payments made under the
Plan as expenses in the calculation of its net investment income.
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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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. 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, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
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TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
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 (other than exempt-interest dividends derived from Connecticut
Obligations) 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.
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 the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in
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the case of certain foreign shareholders) with the required certifications
regarding the shareholder's status under the federal income tax law. Such
withholding is also required on taxable dividends and capital 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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Money Market Series, Massachusetts Series, Michigan
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
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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."
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.
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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 (on settlement date for IRAs); 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
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
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 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
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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 the
calculation of NAV (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. See "Net Asset Value" in the Statement of Additional
Information.
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 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-Registered Trademark- 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
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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 ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command 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, maturity of a bond 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., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, 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, 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."
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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 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.
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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.
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
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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.
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
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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.
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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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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........................ 16
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
</TABLE>
- -------------------------------------------
MF139A
CUSIP No: 74435M-64-8
PROSPECTUS
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(CONNECTICUT MONEY MARKET SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(FLORIDA SERIES)
- ------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Florida Series) (the "Series") is
one of fourteen 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. Subject to the limitations described herein, the Series
may utilize derivatives, including buying and selling futures contracts and
options thereon for the purpose of hedging its portfolio securities. 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 November 1,
1995, 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 fourteen 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, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 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 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
(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.................................... .10++ .50 .75
Other Expenses (Before Subsidy)............... .25 .25 .25
--
--- ---
Total Fund Operating Expenses (Before Waiver
and Subsidy)................................. .85% 1.25% 1.50%
--
--
--- ---
--- ---
</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 $ 56 $ 76 $ 132
Class B............................................................. $ 63 $ 70 $ 79 $ 125
Class C............................................................. $ 25 $ 47 $ 82 $ 179
You would pay the following expenses on the same investment, assuming
no redemption:
Class A............................................................. $ 38 $ 56 $ 76 $ 132
Class B............................................................. $ 13 $ 40 $ 69 $ 135
Class C............................................................. $ 15 $ 47 $ 82 $ 179
The above examples are based on restated data for the Series' fiscal year ended August 31, 1995. THE EXAMPLES
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, 1995,
without taking into account the management and 12b-1 fee waivers (Class A
shares only) and the subsidy of expenses. At the current level of
management fee waiver (70%) and other expense subsidy (100%), Management
Fees, Other Expenses and Total Fund Operating Expenses would be .15%,
.10% and .25%, respectively, of the average net assets of the Series'
Class A shares and .15%, .50% and .65%, respectively, of the average net
assets of the Series' Class B shares and .15%, .75% and .90%,
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, 1996. Total Fund Operating Expenses (Before Waiver and
Subsidy) of the Class A shares without such limitation would be 1.05%.
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 (A)
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991
---------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 9.55
---------- ---------- -------- -------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).......... .59 .59 .57 .65 .44
Net realized and unrealized gain on
investment transactions........... .15 (.76) .73 .51 .21
---------- ---------- -------- -------- ------------
Total from investment
operations..................... .74 (.17) 1.30 1.16 .65
---------- ---------- -------- -------- ------------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.59) (.59) (.57) (.65) (.44)
Distributions from net realized
gains............................. -- (.20) (.13) -- --
---------- ---------- -------- -------- ------------
Total distributions............ (.59) (.79) (.70) (.65) (.44)
---------- ---------- -------- -------- ------------
Net asset value, end of period..... $ 10.06 $ 9.91 $ 10.87 $ 10.27 $ 9.76
---------- ---------- -------- -------- ------------
---------- ---------- -------- -------- ------------
TOTAL RETURN (D):.................. 7.85% (1.69)% 13.78% 12.26% 6.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $120,963 $134,849 $148,900 $104,335 $63,929
Average net assets (000)........... $124,259 $146,489 $123,820 $ 82,893 $41,528
Ratios to average net assets (c):
Expenses, including distribution
fees............................ .24% .20% .20% .09% 0
Expenses, excluding distribution
fees............................ .17% .20% .20% .09% 0
Net investment income............ 6.04% 5.67% 5.94% 6.41% 6.68%(b)
Portfolio turnover rate............ 65% 75% 68% 56% 39%
<FN>
---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of expense subsidy and fee waiver.
(d) 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 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
---------------------------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
------------ ------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 9.91 $ 9.95
------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(c)..................... .55 .04
.15 (.04)
Net realized and
unrealized gain (loss)
on
investment
transactions............
------ ------
Total from investment
operations.......... .70 --
------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.55) (.04)
Distributions from net
realized gains.......... -- --
------ ------
Total
distributions....... (.55) (.04)
------ ------
Net asset value, end of $ 10.06 $ 9.91
period..................
------ ------
------ ------
TOTAL RETURN (D):........ 6.77% (0.05)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 8,326 $ 582
Average net assets
(000)................... $ 4,699 $ 118
Ratios to average net
assets (c):
Expenses, including
distribution fee...... .67% .70%(b)
Expenses, excluding
distribution fee...... .17% .20%(b)
Net investment
income................ 5.56% 6.21%(b)
Portfolio turnover
rate.................... 65% 75%
<FN>
-----------------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) Net of expense subsidy and fee waiver.
(d) 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 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, 1993
YEAR ENDED YEAR ENDED (A) THROUGH
AUGUST 31, AUGUST 31, AUGUST 31,
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, $ 10.87 $ 10.58
beginning of period..... $ 9.91
------------- ------------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(c)..................... .53 .48 .03
.15 (.76) .29
Net realized and
unrealized gain (loss)
on
investment
transactions............
------------- ------------ ------
Total from investment
operations.......... .68 (.28) .32
------------- ------------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.53) (.48) (.03)
Distributions from net
realized gains.......... -- (.20) --
------------- ------------ ------
Total
distributions....... (.53) (.68) (.03)
------------- ------------ ------
Net asset value, end of $ 10.06 $ 9.91 $ 10.87
period..................
------------- ------------ ------
------------- ------------ ------
TOTAL RETURN (D):........ 7.12% (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 9,028 $11,185 $ 3,132
Average net assets
(000)................... $10,265 $ 9,280 $ 1,038
Ratios to average net
assets (c):
Expenses, including
distribution fee...... .92% .95% .95%(b)
Expenses, excluding
distribution fee...... .17% .20% .20%(b)
Net investment
income................ 5.35% 4.99% 5.19%(b)
Portfolio turnover
rate.................... 65% 75% 68%
<FN>
---------------------
(a) Commencement of offering of Class C shares. Prior to August 1, 1994,
Class C shares were called Class D shares.
(b) Annualized.
(c) Net of expense subsidy and fee waiver.
(d) 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 FOURTEEN 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
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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.
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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.
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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
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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 plus
Working Capital and Budget Stabilization funds available total $14,682.9 million
for 1994-1995, an increase of 6.1% over revenues for 1993-1994. This amount
reflects a transfer of $159 million in non-recurring revenue due to Hurricane
Andrew, to a hurricane relief trust fund. Estimated Revenue of $13,702.1 million
(excluding the Hurricane Andrew impacts) for fiscal 1994-1995 represents an
increase of 6.6% over 1993-1994. 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
in the Statement of Additional Information.
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).
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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 Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of expense subsidy and fee waivers, were
.24%, .67% and .92% 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, 1995, the Series paid PMF a
management fee, net of waiver, of .27 of 1% of the Series' average net assets.
See "Fee Waivers and Subsidy" below and "Manager" in the Statement of Additional
Information.
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As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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, a unit of PIC. 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, 1995, PMF voluntarily waived $464,337
(.33 of 1% of average net assets) of its management fee and subsidized all
operating expenses of the Series. Effective September 1, 1993, PMF agreed to
waive 60% of its management fee and to subsidize all operating expenses 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, PMF agreed to waive 70% of its management fee and Prudential
Mutual Fund Distributors, Inc. eliminated 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
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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, 1996.
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, 1995, the Series paid distribution
expenses of .07 of 1%, of .50 of 1% and .75 of 1% 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.
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 distribution and service
fees 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 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
16
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS
AND DIVIDING THE REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV IS
CALCULATED SEPARATELY FOR EACH CLASS. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME
OF DAY FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different 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
17
<PAGE>
"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.
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
18
<PAGE>
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 the Internal Revenue Code, 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 has a capital loss
carryforward of
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<PAGE>
$2,726,000, which expires in 2003. Accordingly, no capital gains distributions
are expected to be paid to shareholders until net gains have been realized in
excess of such amount. The Series will elect to treat net capital losses of
approximately $2,138,200 incurred in the ten month period ended August 31, 1995
as having been incurred in the following fiscal year. 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.
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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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.
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<PAGE>
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain 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.
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<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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C SHARES)
WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
------------------------------------ --------------------- ------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently Initial sales charge waived or
of the public offering price being charged at a reduced for certain purchases
rate of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser 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).
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<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 of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ----------------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
24
<PAGE>
OTHER WAIVERS. 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) and (iii) the financial adviser served as the client's
broker on the previous purchase.
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
25
<PAGE>
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 such involuntary redemption.
90-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 90 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 generally 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
26
<PAGE>
price or the current value of the shares being redeemed. Increases in the value
of your shares or shares acquired through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any contingent deferred
sales charge will be paid to and retained by the Distributor. See "How the Fund
is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE OF
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.
27
<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.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 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. 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. 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.
29
<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.
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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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>
- -------------------------------------------
MF148A 444-3351
Class A: 74435M-50-7
CUSIP Nos.: Class B: 74435M-60-6
Class C: 74435M-61-4
PROSPECTUS
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(FLORIDA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(HAWAII INCOME SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Hawaii Income Series) (the
"Series") is one of fourteen 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 Hawaii 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. Subject to the limitations described herein,
the Series may utilize derivatives, including buying and selling futures
contracts and options thereon for the purpose of hedging its portfolio
securities. There can be no assurance that the Series' investment objective will
be achieved. See "How the Fund Invests--Investment Objective and Policies." The
Fund's address is One Seaport Plaza, New York, New York 10292, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Hawaii Income Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated November 1,
1995, 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 fourteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Hawaii Income Series is offered
through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Hawaii State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Hawaii State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay income exempt, in the opinion
of counsel, from Hawaii State and federal income taxes (Hawaii Obligations).
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Hawaii Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Hawaii Obligations. See "How the
Fund Invests--Investment Objective and Policies" at page 6. The Series is
non-diversified so that more than 5% of its total assets may be invested in
the securities of one or more issuers. Investment in a non-diversified
portfolio involves greater risk than investment in a diversified portfolio.
See "How the Fund Invests--Investment Objective and Policies--Special
Considerations" at page 9. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 8.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 11.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and is paid an annual distribution and service
fee which is currently being charged at the rate of .10 of 1% of the average
daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid an annual
distribution and service fee at the rate of .50 of 1% of the average daily
net assets of the Class B shares and is paid an annual distribution and
service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares.
See "How the Fund is Managed--Distributor" at page 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain retirement and employee savings plans. For purchases made through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 19 and "Shareholder Guide-- Shareholder Services" at page 26.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 14 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 19.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A
shares, Class B shares will automatically convert
to Class A shares (which are subject to lower
ongoing distribution-related expenses)
approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing
distribution-related expenses than Class A shares
but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
22.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 15.
3
<PAGE>
FUND EXPENSES
(HAWAII INCOME 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 1% made within one
annually to 1% in the year of purchase
fifth and sixth years
and 0% the seventh year*
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES** CLASS A SHARES CLASS B SHARES CLASS C SHARES
------------------- ---------------------- -------------------
<S> <C> <C> <C>
(as a percentage of average net assets)
Management Fees (Before Reduction).................... .50% .50% .50%
12b-1 Fees............................................ .10++ .50 .75++
Other Expenses (Before Reduction)..................... 1.90 1.90 1.90
----- ----- -----
Total Fund Operating Expenses (Before Reduction)...... 2.50% 2.90% 3.15%
----- ----- -----
----- ----- -----
Total Fund Operating Expenses (After Reduction)....... .50% .90% 1.15%
----- ----- -----
----- ----- -----
</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................................................ $ 35 $ 46 $ 57 $ 91
Class B................................................ $ 59 $ 59 $ 60 $ 94
Class C................................................ $ 22 $ 37 $ 63 $ 140
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 35 $ 46 $ 57 $ 91
Class B................................................ $ 9 $ 29 $ 50 $ 94
Class C................................................ $ 12 $ 37 $ 63 $ 140
<FN>
The above examples are based on restated data for the Series' fiscal year ended
August 31, 1995. THE EXAMPLES 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."
** Based on expenses incurred during the fiscal year ended August 31, 1995,
after consideration of expense reduction, without taking into account the
management fee waiver. The Manager has agreed for the fiscal year ending
August 31, 1996, to subsidize expenses and waive management fees so that
Total Fund Operating Expenses do not exceed .50%, .90% and 1.15% of the
average net assets of the Class A, Class B and Class C shares,
respectively. At the current level of management fee waiver (.05 of 1%),
Management Fees and Total Fund Operating Expenses (After Reduction) would
be .45% and .45%, respectively, of the average net assets of the Series'
Class A shares, .45% and .85%, respectively, of the average net assets of
the Series' Class B shares and .45% and 1.10%, 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 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, 1996. Total Fund Operating Expenses (Before Reduction) of the
Class A and Class C shares without such limitations would be 2.70% and
3.40%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT THE PERIOD
INDICATED)
The following financial highlights for the period September 19, 1994
(commencement of investment operations) through August 31, 1995, 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, Class B and 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>
SEPTEMBER 19, 1994 (B)
THROUGH AUGUST 31, 1995
---------------------------
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $11.64 $11.64 $11.64
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d).................... .58 .54 .51
.49 .49 .49
Net realized and unrealized gain (loss) on
investment transactions.....................
------- ------- -------
Total from investment operations......... 1.07 1.03 1.00
------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.58) (.54) (.51)
------- ------- -------
Net asset value, end of period............... $12.13 $12.13 $12.13
------- ------- -------
------- ------- -------
TOTAL RETURN (C):............................ 9.42% 9.03% 8.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $3,333 $8,949 $ 797
Average net assets (000)..................... $2,778 $6,270 $ 373
Ratios to average net assets: (a)/(d)
Expenses, including distribution fees...... .46% .86% 1.11%
Expenses, excluding distribution fees...... .36% .36% .36%
Net investment income...................... 5.32% 5.03% 4.79%
Portfolio turnover rate...................... 75% 75% 75%
<FN>
-----------------------
(a) Annualized.
(b) Commencement of investment operations.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of the period reported and includes reinvestment of dividends. Total
return is not annualized.
(d) Net of expense subsidy and management fee waiver.
</TABLE>
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END INVESTMENT COMPANY,
OR MUTUAL FUND, CONSISTING OF FOURTEEN SEPARATE SERIES. EACH SERIES OF THE FUND
IS MANAGED INDEPENDENTLY. THE HAWAII INCOME SERIES (THE SERIES) IS
NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM HAWAII STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL. See "Investment Objectives and Policies" in the
Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN HAWAII STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM HAWAII STATE AND FEDERAL INCOME TAXES
(HAWAII OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Hawaii law provides that dividends paid by the Series are exempt
from Hawaii State income tax for individuals who reside in Hawaii to the extent
such dividends are derived from interest payments on Hawaii Obligations. Hawaii
Obligations may include general obligation bonds of the State, counties, cities,
towns, etc., revenue bonds of utility systems, highways, bridges, port and
airport facilities, colleges, hospitals, etc., and industrial development and
pollution control bonds. The Series will invest in long-term Hawaii Obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series may also invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Currently,
interest rates are much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio may be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
6
<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.
ALL HAWAII OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the Hawaii 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 Hawaii 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 Hawaii 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 HAWAII OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that at least 80% of the income will be exempt from Hawaii State
and federal income taxes or the Series will have at least 80% of its total
assets invested in Hawaii Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper and general
obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Hawaii Obligations or may invest its
assets so that more than 20% of the income is subject to Hawaii State or federal
income taxes.
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.
7
<PAGE>
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON HAWAII OBLIGATIONS WHICH
IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Hawaii Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
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
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OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE AGREEMENT IS
MADE. No physical delivery of the underlying securities is made. The Series will
engage in transactions in only those futures contracts and options thereon that
are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN HAWAII OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN HAWAII OBLIGATIONS TO THIS DEGREE. Hawaii's economy is
concentrated in retail trade and
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tourism and also includes construction, agriculture and military operations.
Tourism dominates Hawaii's economy, with six out of ten jobs in the economy
related to tourism. By attracting tourists from Asia, the United States and
Europe, Hawaii's tourism economy has become less volatile. Nevertheless, the
number of visitors has declined in recent years because of recessions in both
the United States and Japan. Reported improvement in tourism has not yet been
reflected in State revenues, and has lagged early estimates. Agriculture,
dominated by pineapple and sugar production, has experienced increased foreign
competition and a reduction in operations by major producers. There has,
however, been some diversification in the agriculture products raised in Hawaii
and such diversification has provided some alternative employment opportunities.
The State's economy has in recent years reflected the effects of the general
economic recession in the United States and Asia. If the issuers of any of the
Hawaii Obligations are unable to meet their 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. See
"Investment Objectives and Policies--Special Considerations Regarding Investment
in Tax-Exempt Securities" in the Statement of Additional Information.
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.
The Series may not purchase securities (other than municipal obligations and
obligations guaranteed as to principal and interest by the U.S. Government or
its agencies or instrumentalities) if, as a result of such purchase, 25% or more
of the total assets of the Series (taken at current market value) would be
invested in any one industry.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and if the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are
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not readily marketable. Securities, including municipal lease obligations, that
have a readily available market are not considered illiquid for the purposes of
this limitation. The Series intends to comply with applicable state blue sky
laws restricting the Series' investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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 period September 19, 1994 (commencement of investment operations)
through August 31, 1995, total expenses of the Series as an annualized
percentage of average net assets, net of expense subsidy and fee waivers, were
.46%, .86% and 1.11% 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 period September 19, 1994 (commencement of investment
operations) through August 31, 1995, the Series paid PMF a management fee of .46
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, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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 is Christian Smith, an Investment Associate of
Prudential Investment Advisors, a unit of PIC. Mr. Smith has responsibility for
the day-to-day management of the portfolio. He has managed the portfolio since
its inception and has been employed by PIC in various capacities since 1988.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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<PAGE>
FEE WAIVERS AND SUBSIDY
Effective upon inception of the Series, PMF voluntarily agreed to subsidize
expenses and waive management fees so that total Series operating expenses would
not exceed .50%, .90% and 1.15% of the average net assets of the Class A, Class
B and Class C shares, respectively. Effective January 1, 1995, PMF agreed to
waive 10% of its management fee. For the fiscal year ending August 31, 1996, PMF
has voluntarily agreed to continue to subsidize expenses so that total Series
operating expenses do not exceed .50%, .90% and 1.15% of the average net assets
of the Class A, Class B and Class C shares, respectively. The Series is not
required to reimburse PMF for any such subsidy or waiver. Thereafter, PMF may
from time to time agree to waive its management fee or a portion thereof and
subsidize certain operating expenses of the Series. Fee waivers and expense
subsidies will increase the Series' yield and total return. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE 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, 1996.
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
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<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, 1996. Prudential Securities also receives contingent deferred sales charges
from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the period September 19, 1994 through August 31, 1995, the Series paid
annualized distribution expenses of .10%, .50% and .75% 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. 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 distribution and service
fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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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 NAV OF
THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the 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.
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HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS 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.
15
<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 Hawaii law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on December 31, 1994. Dividends paid by the Series and derived from interest on
obligations which pay interest excludable from Hawaii income tax under Hawaii
law will be exempt from the Hawaii income tax (although not from the Hawaii
franchise tax). To the extent a portion of the dividends are derived from
interest on debt obligations other than those described directly above, such
portion will be subject to the Hawaii income tax even though it may be
excludable from
16
<PAGE>
gross income for federal income tax purposes. In addition, distributions of
short-term capital gains realized by the Series will be taxable to the
shareholders as ordinary income. Distributions of long-term capital gains will
be taxable as such to the shareholders regardless of how long they held their
shares.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or Hawaii purposes.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gains distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each such class will bear its own distribution
charges, generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any taxable dividends or distributions of capital gains paid shortly after a
purchase by an investor will have the effect of reducing the per share net asset
value of the investor's shares by the per share amount of the dividends or
distributions. Such dividends or distributions, although in effect a return of
invested principal, are subject to federal income taxes. Accordingly, prior to
purchasing shares of the the Series, an investor should carefully consider the
impact of taxable dividends and capital gains distributions which are expected
to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
Series, New Jersey Series, New Jersey Money Market Series, New York Income
Series (not presently being offered), New York Series, New York
17
<PAGE>
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 trust and a Massachusetts
business corporation relates to shareholder liability. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the fund, which is not the
case with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
18
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares.The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain 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 (Hawaii Income Series), specifying
on the wire the account number assigned by PMFS and your name and identifying
the sales charge alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
19
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND THE
LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE 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 Initial sales charge waived or reduced for
public offering price being charged at a rate certain purchases
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 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 Shares do not convert to another class
amount invested or the redemption proceeds charged at a rate of .75
on redemptions made within one year of of 1%)
purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the 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.
20
<PAGE>
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at
the time of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------- ---------------------- ---------------------- -------------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
OTHER WAIVERS. 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) 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
21
<PAGE>
initial sales charges are imposed upon Class A shares acquired upon the
reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with
22
<PAGE>
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 such involuntary redemption.
90-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 90 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 generally not be allowed for
federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
YEAR SINCE PURCHASE PERCENTAGE 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>
23
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years;
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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.
24
<PAGE>
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature 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.
25
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED
ABOVE.
SPECIAL EXCHANGE PRIVILEGE. 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. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges."
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
26
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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................................................. 6
Investment Objective and Policies.................................. 6
Other Investments and Policies..................................... 10
Investment Restrictions............................................ 11
HOW THE FUND IS MANAGED.............................................. 11
Manager............................................................ 11
Distributor........................................................ 12
Portfolio Transactions............................................. 14
Custodian and Transfer and Dividend Disbursing Agent............... 14
HOW THE FUND VALUES ITS SHARES....................................... 14
HOW THE FUND CALCULATES PERFORMANCE.................................. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 15
GENERAL INFORMATION.................................................. 17
Description of Shares.............................................. 17
Additional Information............................................. 18
SHAREHOLDER GUIDE.................................................... 19
How to Buy Shares of the Fund...................................... 19
Alternative Purchase Plan.......................................... 20
How to Sell Your Shares............................................ 22
Conversion Feature--Class B Shares................................. 24
How to Exchange Your Shares........................................ 25
Shareholder Services............................................... 26
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
-------------------------------------------
MF165A
Class A: 74435M-47-3
CUSIP Nos.: Class B: 74435M-46-5
Class C: 74435M-45-7
PRUDENTIAL
MUNICIPAL
SERIES FUND
(HAWAII INCOME SERIES)
- --------------------------------------
NOVEMBER 1, 1995
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MARYLAND SERIES)
- ----------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Maryland Series) (the "Series")
is one of fourteen 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. Subject to the limitations described herein,
the Series may utilize derivatives, including buying and selling futures
contracts and options thereon for the purpose of hedging its portfolio
securities. 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 November 1,
1995, 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
fourteen 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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 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 (Before
Waiver)........................ .50% .50% .50%
12b-1 Fees...................... .10++ .50 .75++
Other Expenses.................. .62 .62 .62
Total Fund Operating Expenses 1.22% 1.62% 1.87%
(Before Waiver)................
</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 $ 95 $ 173
Class B............................................................................... $ 66 $ 81 $ 98 $ 177
Class C............................................................................... $ 29 $ 59 $ 101 $ 219
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<S> <C> <C> <C> <C>
Class A............................................................................... $ 42 $ 68 $ 95 $ 173
Class B............................................................................... $ 16 $ 51 $ 88 $ 177
Class C............................................................................... $ 19 $ 59 $ 101 $ 219
<FN>
The above examples are based on restated data for the Series' fiscal year ended August 31, 1995. THE EXAMPLES 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."
**Based on expenses incurred during the fiscal year ended August 31, 1995, without taking into account the management fee
waiver. At the current level of management fee waiver (.05 of 1%), Management Fees and Total Fund Operating Expenses would be
.45% and 1.17%, respectively, of the average net assets of the Series' Class A shares, .45% and 1.57%, respectively, of the
average net assets of the Series' Class B shares and .45% and 1.82%, respectively, of the average net assets of the Series'
Class C shares. See "How the Fund is Managed--Manager--Fee Waivers."
+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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class A and Class C shares without such
limitations would be 1.42% and 2.12%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1995, 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(A)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991 1990
------ ------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $10.66 $ 11.64 $11.11 $10.67 $10.23 $10.44
----- ----- ----- ----- ----- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.............. .53(d) .57 .62 .63 .67 .40
Net realized and unrealized gain
(loss) on investment
transactions...................... .10 (.77) .65 .44 .44 (.21)
----- ----- ----- ----- ----- -------
Total from investment
operations.................... .63 (.20) 1.27 1.07 1.11 .19
----- ----- ----- ----- ----- -------
LESS DISTRIBUTIONS
Dividends from net investment
income............................ (.53) (.57) (.62) (.63) (.67) (.40)
Distributions from net realized
gains............................. (.10) (.21) (.12) -- -- --
----- ----- ----- ----- ----- -------
Total distributions............ (.63) (.78) (.74) (.63) (.67) (.40)
----- ----- ----- ----- ----- -------
Net asset value, end of period..... $10.66 $ 10.66 $11.64 $11.11 $10.67 $10.23
----- ----- ----- ----- ----- -------
----- ----- ----- ----- ----- --------
TOTAL RETURN (C):.................. 6.32% (1.75)% 11.89% 10.35% 10.84% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $17,726 $ 2,709 $2,930 $1,335 $ 804 $ 349
Average net assets (000)........... $11,341 $ 2,877 $2,068 $1,080 $ 518 $ 141
Ratios to average net assets:
Expenses, including distribution
fees............................ 1.30%(d) .95% .96% .96% 1.10% 1.01%(b)
Expenses, excluding distribution
fees............................ 1.20%(d) .85% .86% .86% 1.00% .91%(b)
Net investment income............ 4.96%(d) 5.18% 5.51% 5.80% 6.07% 6.31%(b)
Portfolio turnover rate............ 49% 40% 41% 34% 18% 46%
<FN>
- -------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is calculated
assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
</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, 1995, 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
--------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------------------------
1989
1995 1994 1993 1992 1991 1990 (B) 1988 1987 1986
-------- -------- ------- ------- ------- ------- ------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
year.......... $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $10.23 $ 10.29 $ 10.72 $ 9.93
-------- -------- ------- ------- ------- ------- ------- ------- --------- -------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income........ .49(d) .53 .58 .59 .63 .62 .65 .69(a) .68(a) .76(a)
Net realized
and unrealized
gain (loss) on
investment
transactions.. .10 (.77) .65 .44 .45 (.25) .25 (.06) (.43) .79
----- ----- ----- ----- ----- ----- ------ ----- ----- ------
Total from
investment
operations.. .59 (.24) 1.23 1.03 1.08 .37 .90 .63 .25 1.55
----- ----- ----- ----- ----- ----- ------ ----- ----- ------
LESS
DISTRIBUTIONS
Dividends from
net investment
income........ (.49) (.53) (.58) (.59) (.63) (.62) (.65 ) (.69) (.68) (.76)
Distributions
from net
realized
gains......... (.10) (.21) (.12) -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ------ ----- ----- ------
Total
distributions... (.59) (.74) (.70) (.59) (.63) (.62) (.65 ) (.69) (.68) (.76)
----- ----- ----- ----- ----- ----- ------ ----- ----- ------
Net asset
value, end of
year.......... $ 10.67 $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $10.48 $ 10.23 $ 10.29 $ 10.72
----- ----- ----- ----- ----- ----- ------ ----- ----- ------
----- ----- ----- ----- ----- ----- ------ ----- ----- --------
TOTAL RETURN
(C):.......... 5.88% (2.13)% 11.43% 9.90% 10.49% 3.58% 9.17 % 6.38% 2.29% 16.15%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of year
(000)......... $ 21,414 $ 51,198 $57,598 $51,313 $51,110 $48,226 $47,409 $39,154 $ 33,287 $23,744
Average net
assets
(000)......... $ 33,497 $ 55,223 $53,780 $50,970 $48,422 $48,573 $44,243 $35,675 $ 30,537 $16,968
Ratios to
average net
assets:
Expenses,
including
distribution
fees........ 1.55%(d) 1.35% 1.36% 1.37% 1.49% 1.40% 1.37 % 1.24%(a) 1.16%(a) 1.01%(a)
Expenses,
excluding
distribution
fees........ 1.05%(d) .85% .86% .87% .99% .92% .90 % .75%(a) .67%(a) .52%(a)
Net
investment
income...... 4.85%(d) 4.77% 5.11% 5.42% 5.70% 5.95% 6.26 % 6.67%(a) 6.26%(a) 6.90%(a)
Portfolio
turnover
rate.......... 49% 40% 41% 34% 18% 46% 47 % 46% 35% 30%
<FN>
- ---------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The Prudential Insurance Company of America as
manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
(d) Net of management fee waiver.
</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 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
------------------------------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
------------ ---------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 10.67 $ 10.70
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................. .47(d) .05
Net realized and unrealized gain (loss) on investment
transactions.......................................... .10 (.03)
------ ------
Total from investment operations................... .57 .02
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income................... (.47) (.05)
Distributions from net realized gains.................. (.10) --
------ ------
Total distributions................................ (.57) (.05)
------ ------
Net asset value, end of period......................... $ 10.67 $ 10.67
------ ------
------ ---------
TOTAL RETURN (C):...................................... 5.62% .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 52 $ 102
Average net assets (000)............................... $ 58 $ 31
Ratios to average net assets:
Expenses, including distribution fees................ 1.82%(d) 2.21%(b)
Expenses, excluding distribution fees................ 1.07%(d) 1.47%(b)
Net investment income................................ 4.55%(d) 4.75%(b)
Portfolio turnover rate................................ 49% 40%
<FN>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c)Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the last day
of each period reported and includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
(d) Net of management fee waiver.
</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 FOURTEEN 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
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correlation may be affected by additions to or deletions from the index which
serves as the basis for a futures contract. Finally, if the price of the
security that is subject to the hedge were to move in a favorable direction, the
advantage to the Series would be partially offset by the loss incurred on the
futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN 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,
1993 to a positive balance of $113.9 million on June 30, 1994. Financial
operations continued to improve in fiscal year 1995, with revenues exceeding
estimates by $217 million and expenditures at $184 million above budget. At
fiscal year-end, the General Fund recorded an undesignated fund balance of $26.5
million (after reservation of $106 million for fiscal year 1996 expenses). An
additional $286.1 million was on deposit in the Revenue Stabilization Account of
the State Reserve Fund. The 1996 budget continues the trend of increased
budgetary reserves. The operating budget assumes moderate revenue growth and
expenditures of $14.428 billion, a 6.6% increase over the actual expenditures in
fiscal year 1995. The State projects a year-end General Fund balance of $34.3
million and an additional $518 million in the Revenue Stabilization Account of
the State Reserve Fund. Other issuers of Maryland Obligations are subject to
various risks and uncertainties, and the credit quality of the securities issued
by them may vary considerably from the credit quality of obligations issued by
the State. If either the 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
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).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
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PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were 1.30%, 1.55% and
1.82% 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, 1995, the Series paid PMF a
management fee of .47 of 1% of the Series' average net assets. See "Fee Waivers"
below and "Manager" in Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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.
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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, a unit of PIC. 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
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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
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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, 1996.
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, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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.
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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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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.
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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."
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.
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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 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.
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 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, distributions attributable (i) to
gain realized by the Series on the disposition of those Maryland Obligations
issued by the State of Maryland or its political subdivisions and (ii) to
interest received by the Series on U.S. Government obligations are exempt from
Maryland personal income tax.
Distributions other than those described as exempt in the preceding paragraph
will be subject to Maryland personal income tax.
WITHHOLDING TAXES
Under the Internal Revenue Code, 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.
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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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.
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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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.
OTHER WAIVERS. 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
23
<PAGE>
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) 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
24
<PAGE>
ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may be postponed or the
right of redemption suspended at times (a) when the New York Stock Exchange is
closed for other than customary weekends and holidays, (b) when trading on such
Exchange is restricted, (c) when an emergency exists as a result of which
disposal by the Series of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Series fairly to determine the value
of its net assets, or (d) during any other period when the SEC, by order, so
permits: provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-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 90 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 generally 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.
25
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
--------------------------------- -------------------------
<S> <C>
First............................ 5.0%
Second........................... 4.0%
Third............................ 3.0%
Fourth........................... 2.0%
Fifth............................ 1.0%
Sixth............................ 1.0%
Seventh.......................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. 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.
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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 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
27
<PAGE>
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. 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. 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
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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
Equity Funds
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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.................................... 27
How to Exchange Your Shares........................................... 27
Shareholder Services.................................................. 29
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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MARYLAND SERIES)
- -------------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS SERIES)
- ----------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Massachusetts Series) (the
"Series") is one of fourteen 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. Subject to the limitations
described herein, the Series may utilize derivatives, including buying and
selling futures contracts and options thereon for the purpose of hedging its
portfolio securities. 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 November 1,
1995, 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
fourteen 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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>
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
(Before Waiver).... .50% .50% .50%
12b-1 Fees.......... .10++ .50 .75++
Other Expenses...... .39 .39 .39
--
--- ---
Total Fund Operating
Expenses (Before
Waiver)............ .99% 1.39% 1.64%
--
--
--- ---
--- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A...................................... $40 $61 $83 $148
Class B...................................... $64 $74 $86 $141
Class C...................................... $27 $52 $89 $194
You would pay the following expenses on the same
investment, assuming no redemption:
Class A...................................... $40 $61 $83 $148
Class B...................................... $14 $44 $76 $151
Class C...................................... $17 $52 $89 $194
The above examples are based on restated data for the Series' fiscal year ended August 31, 1995.
THE EXAMPLES 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, 1995,
without taking into account the management fee waiver. At the current level
of management fee waiver (.05 of 1%), Management Fees and Total Fund
Operating Expenses would be .45% and .94%, respectively, of the average net
assets of the Series' Class A shares, .45% and 1.34%, respectively, of the
average net assets of the Series' Class B shares and .45% and 1.59%,
respectively, of the average net assets of the Series' Class C shares. See
"How the Fund is Managed--Manager--Fee Waivers."
+ 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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class
A and Class C shares without such limitations would be 1.19% and 1.89%,
respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1995, 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 (A)
AUGUST 31, THROUGH
------------------------------------------ AUGUST 31,
1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $11.37 $12.17 $11.50 $10.94 $10.44 $ 10.70
------ ------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .65(d) .67 .68 .69 .70 .41
Net realized and
unrealized gain (loss)
on
investment
transactions............ .26 (.73) .67 .56 .50 (.26)
------ ------ ------ ------ ------ -----------
Total from investment
operations............ .91 (.06) 1.35 1.25 1.20 .15
------ ------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.65) (.67) (.68) (.69) (.70) (.41)
Distributions from net
realized gains.......... -- (.07) -- -- -- --
------ ------ ------ ------ ------ -----------
Total distributions.... (.65) (.74) (.68) (.69) (.70) (.41)
------ ------ ------ ------ ------ -----------
Net asset value, end of
period.................. $11.63 $11.37 $12.17 $11.50 $10.94 $ 10.44
------ ------ ------ ------ ------ -----------
------ ------ ------ ------ ------ -----------
TOTAL RETURN (C):........ 8.33% (.58)% 12.10% 11.76% 11.81% 1.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $27,525 $2,293 $2,325 $ 903 $ 665 $ 257
Average net assets
(000)................... $15,837 $2,578 $1,336 $ 770 $ 344 $ 127
Ratios to average net
assets:
Expenses, including
distribution fee...... .97%(d) .87% .95% .99% 1.05% 1.04%(b)
Expenses, excluding
distribution fee...... .87%(d) .77% .85% .89% .95% .95%(b)
Net investment
income................ 5.59%(d) 5.60% 5.79% 6.14% 6.53% 6.60%(b)
Portfolio turnover....... 36% 33% 56% 32% 34% 33%
<FN>
-----------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Net of management fee waiver.
</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, 1995, 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
----------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------------------
1989
1995 1994 1993 1992 1991 1990 (B) 1988 1987 1986
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $11.36 $12.17 $11.49 $10.94 $10.44 $10.74 $10.53 $10.58 $11.47 $10.46
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .60(d) .61 .63 .64 .65 .65 .68 .71(a) .71(a) .77(a)
Net realized and
unrealized gain (loss)
on investment
transactions............ .26 (.74) .68 .55 .50 (.30) .21 (.05) (.67) 1.02
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............ .86 (.13) 1.31 1.19 1.15 .35 .89 .66 .04 1.79
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.60) (.61) (.63) (.64) (.65) (.65) (.68) (.71) (.71) (.77)
Distributions from net
realized gains.......... -- (.07) -- -- -- -- -- -- (.22) (.01)
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
Total distributions.... (.60) (.68) (.63) (.64) (.65) (.65) (.68) (.71) (.93) (.78)
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
period.................. $11.62 $11.36 $12.17 $11.49 $10.94 $10.44 $10.74 $10.53 $10.58 $11.47
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
------ ------ ----- ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (C):........ 7.90% (1.15)% 11.77% 11.23% 11.38% 3.40% 8.67% 6.54% 0.31% 17.94%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $28,367 $55,420 $61,121 $53,449 $49,641 $50,575 $52,754 $45,278 $40,655 $33,041
Average net assets
(000)................... $39,455 $59,544 $55,965 $50,607 $49,083 $52,974 $49,841 $41,357 $38,462 $25,655
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.34%(d) 1.27% 1.35% 1.39% 1.45% 1.37% 1.34% 1.22%(a) 1.15%(a) 1.15%(a)
Expenses, excluding
distribution fee...... .84%(d) .77% .85% .89% .95% .90% .87% .72%(a) .65%(a) .67%(a)
Net investment
income................ 5.37%(d) 5.20% 5.39% 5.74% 6.13% 6.21% 6.24% 6.76%(a) 6.34%(a) 6.85%(a)
Portfolio turnover....... 36% 33% 56% 32% 34% 33% 23% 41% 116% 55%
<FN>
- -----------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(d) Net of management fee waiver.
</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
---------------------------------------------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.36 $ 11.41
------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .57(d) .04
Net realized and unrealized gain (loss)
on
investment transactions................ .26 (.05)
------- ------
Total from investment operations.... .83 (.01)
------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.57) (.04)
Distributions from net realized gains... -- --
------- ------
Total distributions................. (.57) (.04)
------- ------
$11.62 $11.36
Net asset value, end of period..........
------- ------
------- ------
TOTAL RETURN (C):....................... 7.60% (.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period............... $14,000 $ 216
Average net assets...................... $14,000 $ 15
Ratios to average net assets:
Expenses, including distribution
fee.................................. 1.60%(d) 1.57%(b)
Expenses, excluding distribution
fee.................................. .85%(d) .82%(b)
Net investment income................. 5.07%(d) 5.06%(b)
Portfolio turnover...................... 36% 33%
- -----------------
(a) Commencement of offering of Class C
shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is calculated
assuming a purchase of shares on the first day and a sale on the last day of each period
reported and includes reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
</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 FOURTEEN 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 and led 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. For fiscal year 1994, balances in the Budgeted Operating Funds improved
on both the statutory accounting basis and GAAP basis of accounting. On a
statutory accounting basis, the 1994 fiscal year ended with a balance of $509.9
million. On a GAAP accounting basis, the 1994 fiscal year ended with a balance
of $72,000. Fiscal year 1995 collections, which were projected at $11.151
billion, exceeded estimates by $13 million. Inflexibility dictated by a heavy
debt load and other substantial fixed costs, particularly pension contributions
and transit subsidies, 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
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).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
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ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. The investment adviser will monitor the
liquidity of such restricted securities under the supervision of the Trustees.
See "Investment Objectives and Policies--Illiquid Securities" in the Statement
of Additional Information. Repurchase agreements subject to demand are deemed to
have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISOR AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISOR FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .97%, 1.34% and 1.60%
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, 1995, the Series paid PMF a management fee,
net of waiver, of .47 of 1% of the Series' average net assets. See "Fee Waivers"
below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
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The current portfolio manager is Marie Conti, an Investment Associate of
Prudential Investment Advisors, a unit of PIC. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since April 19, 1995 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. Ms. Conti also manages Prudential Municipal Bond Fund,
Intermediate Series and several of the other series of the Fund.
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
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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 .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, 1996.
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UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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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
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Series' portfolio securities do not materially affect the NAV. The New York
Stock Exchange is closed on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of the
distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS OR SALES LITERATURE. "YIELD," "TAX
EQUIVALENT YIELD" AND "TOTAL RETURN" ARE CALCULATED SEPARATELY FOR CLASS A,
CLASS B AND CLASS C SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND
ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The "yield" refers to the
income generated by an investment in the Series over a one-month or 30-day
period. This income is then "annualized;" that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The "tax equivalent yield" is calculated
similarly to the "yield," except that the yield is increased using a stated
income tax rate to demonstrate the taxable yield necessary to produce an
after-tax 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.
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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.
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.
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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 the Internal Revenue Code, 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. For federal income tax purposes, the
Series has a capital loss carryforward as of August 31, 1995 of approximately
$10,600, which expires in 2003. Accordingly, no capital gains distribution is
expected to be paid to shareholders until future net gains have been realized in
excess of such carryforward. 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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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 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.
21
<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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
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.
OTHER WAIVERS. 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
23
<PAGE>
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) 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
24
<PAGE>
ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may be postponed or the
right of redemption suspended at times (a) when the New York Stock Exchange is
closed for other than customary weekends and holidays, (b) when trading on such
Exchange is restricted, (c) when an emergency exists as a result of which
disposal by the Series of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Series fairly to determine the value
of its net assets, or (d) during any other period when the SEC, by order, so
permits; provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-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 90 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 generally 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.
25
<PAGE>
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------------------ ---------------------------
<S> <C>
First....................................................... 5.0%
Second...................................................... 4.0%
Third....................................................... 3.0%
Fourth...................................................... 2.0%
Fifth....................................................... 1.0%
Sixth....................................................... 1.0%
Seventh..................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 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
27
<PAGE>
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. 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. 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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................... 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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MASSACHUSETTS SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS MONEY MARKET SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Massachusetts Money Market
Series) (the "Series") is one of fourteen 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 November 1, 1995, 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 fourteen 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, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 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 Waiver)........................................ .500 %
12b-1 Fees............................................................. .125 %
Other Expenses......................................................... .375 %
------
Total Fund Operating Expenses (Before Waiver).......................... 1.000 %
------
------
</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 $ 32 $ 55 $121
The above example is based on restated data for the Series' fiscal year ended 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 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, 1995,
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 .125% and .627%, respectively, of the Series' average net
assets. See "How the Fund is Managed-- Manager--Fee Waivers."
</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>
AUGUST 5,
YEAR ENDED AUGUST 31, 1991(A)
---------------------------------- THROUGH
1995 1994 1993 1992 AUGUST 31, 1991
------- ------- ------- ------- ---------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized
gains (c)........................................ .031 .019 .021 .034 .003
Dividends and distributions to shareholders....... (.031) (.019) (.021) (.034) (.003)
------- ------- ------- ------- ------
Net asset value, end of period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN (D):................................. 3.10% 1.89% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $56,822 $37,278 $36,608 $18,019 $6,365
Average net assets (000).......................... $42,919 $42,427 $32,246 $15,477 $3,200
Ratios to average net assets (c):
Expenses, including distribution fee.......... .627% .620% .365% .125% .125%(b)
Expenses, excluding distribution fee.......... .502% .495% .240% .00% .00%(b)
Net investment income......................... 3.14% 1.86% 2.11% 3.20% 4.46%(b)
<FN>
- ------------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return 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,
1995:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $1.000632903
Value of hypothetical account at beginning of period........... 1.000000000
------------
Base period return............................................. $0.000632903
------------
------------
CURRENT YIELD (0.000632903 X (365/7))+......................... 3.30%
EFFECTIVE ANNUAL YIELD, assuming daily compounding+............ 3.36%
TAX-EQUIVALENT CURRENT YIELD (3.30% DIVIDED BY (1 -
46.85%))+..................................................... 6.21%
<FN>
- ------------------------
+ After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax-equivalent yield would have been 2.93%, 2.98% and 5.51%,
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, 1995 was 46 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 FOURTEEN 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.
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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.
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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
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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 and led 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. For fiscal year 1994, balances in the Budgeted
Operating Funds improved on both the statutory accounting basis and GAAP basis
of accounting. On a statutory accounting basis, the 1994 fiscal year ended with
a balance of $509.9 million. On a GAAP accounting basis, the 1994 fiscal year
ended with a balance of $72,000. Fiscal year 1995 collections, which were
projected at $11.151 billion, exceeded estimates by $13 million. Inflexibility
dictated by a heavy debt load and other substantial fixed costs, particularly
pension contributions and transit subsidies, 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. See "Investment
Objectives and Policies--Special Considerations Regarding Investment in
Tax-Exempt Securities" in the Statement of Additional Information.
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.
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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 Series intends to comply with applicable state blue sky laws
restricting the Series' investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of its average net assets, net of fee waiver, were .627%. 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, 1995, the Series paid a
management fee of .125 of 1% of the Series' average net assets after waiver. See
"Fee Waivers" below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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.
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FEE WAIVERS
Effective November 1, 1993, PMF agreed to waive 75% of its management fee.
During the fiscal year ended August 31, 1995, PMF voluntarily waived $160,946 of
its management fee (.375 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, 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, 1995, 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. 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.
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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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. 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,
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municipal and other obligations, the interest on which is excluded from gross
income for federal income tax purposes. During normal market conditions, at
least 80% of the Series' total assets will be invested in such obligations. See
"How the Fund Invests--Investment Objective and Policies."
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 the Internal Revenue Code, 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.
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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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Money Market Series, Massachusetts Series, Michigan
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.
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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
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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 (on settlement date for IRAs); 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
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
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 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 the
calculation of NAV (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. See "Net Asset Value" in the Statement of Additional
Information.
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.
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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-Registered Trademark- 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 ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command 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
the
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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, maturity of a bond 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., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, 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-Registered Trademark- 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.
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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
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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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL SERIES
FUND
(MASSACHUSETTS MONEY MARKET SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MICHIGAN SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Michigan Series) (the "Series")
is one of fourteen 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. Subject to the limitations described herein,
the Series may utilize derivatives, including buying and selling futures
contracts and options thereon for the purpose of hedging its portfolio
securities. 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
Michigan 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 November 1,
1995, 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
fourteen 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 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 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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 (Before Waiver)................. .50% .50% .50%
12b-1 Fees...................................... .10++ .50 .75++
Other Expenses.................................. .42 .42 .42
--- --- ---
Total Fund Operating Expenses (Before Waiver)... 1.02% 1.42% 1.67%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A................................................................ $40 $ 61 $ 85 $151
Class B................................................................ $64 $ 75 $ 88 $154
Class C................................................................ $27 $ 53 $ 91 $198
You would pay the following expenses on the same investment, assuming no
redemption:
Class A................................................................ $40 $ 61 $ 85 $151
Class B................................................................ $14 $ 45 $ 78 $154
Class C................................................................ $17 $ 53 $ 91 $198
The above examples are based on restated data for the Series' fiscal year ended
August 31, 1995. THE EXAMPLES 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, 1995,
without taking into account the management fee waiver. At the current level
of management fee waiver (.05 of 1%), Management Fees and Total Fund
Operating Expenses would be .45% and .97%, respectively, of the average net
assets of the Series' Class A shares, .45% and 1.37%, respectively, of the
average net assets of the Series' Class B shares and .45% and 1.62%,
respectively, of the average net assets of the Series' Class C shares. See
"How the Fund is Managed--Manager--Fee Waivers."
+ 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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class
A and Class C shares without such limitations would be 1.22% and 1.92%,
respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1995, 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 (A)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991 1990
------ ------ ------ ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $11.75 $12.51 $11.90 $ 11.30 $10.81 $11.02
------ ------ ------ ------- ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .64(e) .64 .67 .68 .67 .41
Net realized and unrealized
gain (loss) on investment
transactions................. .17 (.69) .71 .60 .49 (.21)
------ ------ ------ ------- ------ -----------
Total from investment
operations............... .81 (.05) 1.38 1.28 1.16 .20
------ ------ ------ ------- ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.64) (.64) (.67) (.68) (.67) (.41)
Distributions from net
realized gains............... (.03) (.07) (.10) -- -- --
------ ------ ------ ------- ------ -----------
Total distributions....... (.67) (.71) (.77) (.68) (.67) (.41)
------ ------ ------ ------- ------ -----------
Net asset value, end of
period....................... $11.89 $11.75 $12.51 $ 11.90 $11.30 $10.81
------ ------ ------ ------- ------ -----------
------ ------ ------ ------- ------ -----------
TOTAL RETURN (C):............. 7.13% (0.38)% 11.95% 11.63% 11.04% 1.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $27,024 $4,706 $3,814 $ 1,618 $ 835 $ 501
Average net assets (000)...... $16,932 $4,505 $2,285 $ 1,235 $ 694 $ 365
Ratios to average net assets:
Expenses, including
distribution fee........... 1.02%(e) .91% .96%(d) .98% 1.09% 1.09%(b)
Expenses, excluding
distribution fee........... .92%(e) .81% .86%(d) .88% .99% .99%(b)
Net investment income....... 5.31%(e) 5.27% 5.51%(d) 5.82% 6.09% 6.25%(b)
Portfolio turnover rate....... 33% 12% 14% 30% 62% 55%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Restated
(e) Net of management fee waiver.
</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, 1995, 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
------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------------
1989
1995 1994 1993 1992 1991 1990 (B) 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of year................... $11.75 $12.51 $11.90 $11.30 $10.81 $11.03 $10.57 $10.85 $11.94 $10.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... .59(e) .59 .62 .63 .63 .65 .68 .72(a) .73(a) .82(a)
Net realized and unrealized
gain (loss) on investment
transactions.............. .16 (.69) .71 .60 .49 (.22) .46 (.28) (.44) 1.44
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............ .75 (.10) 1.33 1.23 1.12 .43 1.14 .44 .29 2.26
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment income......... (.59) (.59) (.62) (.63) (.63) (.65) (.68) (.72) (.73) (.82)
Distributions from net
realized gains............ (.03) (.07) (.10) -- -- -- -- -- (.65) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions.... (.62) (.66) (.72) (.63) (.63) (.65) (.68) (.72) (1.38) (.82)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of
year...................... $11.88 $11.75 $12.51 $11.90 $11.30 $10.81 $11.03 $10.57 $10.85 $11.94
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL RETURN (C):.......... 6.60% (0.78)% 11.51% 11.18% 10.60% 4.02% 11.08% 4.34% 2.52% 22.38%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)..................... $41,459 $70,112 $70,302 $56,095 $59,400 $49,923 $47,025 $40,489 $40,597 $32,139
Average net assets (000)... $52,216 $72,095 $61,548 $52,137 $50,809 $48,694 $43,957 $39,246 $39,088 $25,698
Ratios to average net
assets:
Expenses, including
distribution fee........ 1.37%(e) 1.31% 1.36%(d) 1.38% 1.49% 1.44% 1.35% 1.20%(a) 1.13%(a) 1.14%(a)
Expenses, excluding
distribution fee........ .87%(e) .81% .86%(d) .88% .99% .97% .96% .72%(a) .66%(a) .66%(a)
Net investment income.... 5.04%(e) 4.87% 5.11%(d) 5.42% 5.66% 5.95% 6.20% 6.85%(a) 6.40%(a) 7.07%(a)
Portfolio turnover rate.... 33% 12% 14% 30% 62% 55% 36% 156% 105% 123%
<FN>
- ---------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(d) Restated.
(e) Net of management fee waiver.
</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
-------------------------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.75 $ 11.78
------ ------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------
Net investment income.............. .56(d) .04
Net realized and unrealized gain
(loss) on
investment transactions........... .16 (.03)
------ ------
Total from investment
operations.................... .72 .01
------ ------
LESS DISTRIBUTIONS
- -----------------------------------
Dividends from net investment
income............................ (.56) (.04)
Distributions from net realized
gains............................. (.03) --
------ ------
Total distributions............ (.59) (.04)
------ ------
Net asset value, end of period..... $ 11.88 $ 11.75
------ ------
------ ------
TOTAL RETURN (C):.................. 6.29% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 100 $ 200(e)
Average net assets (000)........... $ 61 $ 199(e)
Ratios to average net assets:
Expenses, including distribution
fee............................. 1.68%(d) 2.15%(b)
Expenses, excluding distribution
fee............................. .93%(d) 1.39%(b)
Net investment income............ 4.66%(d) 4.56%(b)
Portfolio turnover rate............ 33% 12%
<FN>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Net of management fee waiver.
(e) Figures are actual and not rounded to the nearest thousand.
</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 FOURTEEN 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. Recovery, however, has proved to
be robust in Michigan as employment levels reached an all-time high in 1995.
Michigan's economy is among the most cyclical of all the states and remains
dependent on domestic auto production and durable goods consumption. 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. At the end of fiscal 1994,
the State's Budget Stabilization Fund had increased to $780 million and it was
expected to reach $1.1 billion by the end of fiscal 1995 (September 30) as the
result of continuing surpluses in the State's General Fund balance. Strong
revenue growth continued in fiscal 1995, with the State's original revenue
projections being revised upward by over $350 million in January 1995, with only
a slight downward revision in estimates of $47 million in May 1995. 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. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" 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).
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 Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waiver, were 1.02%, 1.37% and 1.68%
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, 1995, the Series paid PMF a
management fee of .47 of 1% of the Series' average net assets. See "Fee Waivers"
below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
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The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors, a unit of PIC. 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.
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
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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 .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, 1996.
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UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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<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.
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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"
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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.
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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 the Internal Revenue Code, 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
Connecticut Money Market Series, Florida Series, Hawaii
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Income Series, Maryland Series, Massachusetts Series, Massachusetts Money Market
Series, Michigan 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.
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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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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.
OTHER WAIVERS. 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
23
<PAGE>
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (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 such involuntary redemption.
90-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 90 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 generally 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion
27
<PAGE>
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. 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. 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(MICHIGAN SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW JERSEY SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New Jersey Series) (the "Series")
is one of fourteen 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. Subject to the limitations
described herein, the Series may utilize derivatives, including buying and
selling futures contracts and options thereon for the purpose of hedging its
portfolio securities. 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 November 1,
1995, 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 fourteen 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, 1995, PMF served
as manager or administrator to 69 investment companies, including 38 mutual
funds, with aggregate assets of approximately $51 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.............................. .12 .12 .12
Total Fund Operating Expenses (Before
Waiver).................................... .72% 1.12% 1.37%
</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 $69 $117
Class B.......................... $61 $66 $72 $110
Class C.......................... $24 $43 $75 $165
You would pay the following expenses
on the same investment, assuming no
redemption:
Class A.......................... $37 $52 $69 $117
Class B.......................... $11 $36 $62 $120
Class C.......................... $14 $43 $75 $165
The above examples are based on restated data for the Series' fiscal year ended
August 31, 1995. THE EXAMPLES 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, 1995,
without taking into account the partial management fee waiver. At the current
level of management fee waiver (35%), Management Fees would be .325% for
Class A, Class B and Class C shares and Total Fund Operating Expenses would
be .545% for Class A shares, .945% for Class B shares and 1.195% for Class C
shares. See "How the Fund is Managed--Manager--Fee Waivers."
+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, 1996. Total Fund
Operating Expenses (Before Waiver) of the Class A and Class C shares without
such limitations would be .92% and 1.62%, respectively. See "How the Fund is
Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1995, 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 (A)
YEAR ENDED AUGUST 31, THROUGH
----------------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.30
--------- --------- --------- --------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c)................................. .61 .61 .64 .67 .69 .41
Net realized and unrealized gain (loss) on investment
transactions............................................. .17 (.75) .71 .51 .59 (.14)
--------- --------- --------- --------- --------- -----------
Total from investment operations...................... .78 (.14) 1.35 1.18 1.28 .27
--------- --------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income...................... (.61) (.61) (.64) (.67) (.69) (.41)
Distributions from net realized gains..................... -- (.18) (.12) (.09) (.02) --
--------- --------- --------- --------- --------- -----------
Total distributions................................... (.61) (.79) (.76) (.76) (.71) (.41)
--------- --------- --------- --------- --------- -----------
Net asset value, end of period............................ $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
TOTAL RETURN (D):......................................... 7.55% (1.27)% 12.57% 11.35% 12.96% 2.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................... $ 49,666 $14,774 $15,501 $ 11,941 $ 8,041 $ 3,616
Average net assets (000).................................. $ 30,290 $15,334 $13,444 $ 9,759 $ 5,637 $ 1,902
Ratios to average net assets: (c)
Expenses, including distribution fees................... .55% .58% .61% .48% .29% .20%(b)
Expenses, excluding distribution fees................... .45% .48% .51% .38% .19% .10%(b)
Net investment income................................... 5.65% 5.42% 5.63% 6.14% 6.58% 6.79%(b)
Portfolio turnover........................................ 37% 34% 32% 38% 116% 87%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of management and/or distribution fee waiver.
(d)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, 1995, 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 (A)
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991 1990 1989 (D) 1988
--------- --------- --------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95 $ 10.00
--------- --------- --------- --------- --------- --------- --------- ------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c)............. .57 .56 .59 .63 .65 .67 .73 .36
Net realized and unrealized gain
(loss) on investment transactions.... .17 (.75) .71 .51 .59 (.14) .38 (.05)
--------- --------- --------- --------- --------- --------- --------- ------------
Total from investment
operations....................... .74 (.19) 1.30 1.14 1.24 .53 1.11 .31
--------- --------- --------- --------- --------- --------- --------- ------------
LESS DISTRIBUTIONS
Dividends from net investment
income............................... (.57) (.56) (.59) (.63) (.65) (.67) (.73) (.36)
Distributions from net realized
gains................................ -- (.18) (.12) (.09) (.02) (.03) -- --
--------- --------- --------- --------- --------- --------- --------- ------------
Total distributions............... (.57) (.74) (.71) (.72) (.67) (.70) (.73) (.36)
--------- --------- --------- --------- --------- --------- --------- ------------
Net asset value, end of period........ $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95
--------- --------- --------- --------- --------- --------- --------- ------------
--------- --------- --------- --------- --------- --------- --------- ------------
TOTAL RETURN (E):..................... 7.12% (1.67)% 12.12% 10.93% 12.52% 5.28% 11.48% 3.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....... $246,202 $323,077 $351,878 $295,781 $244,322 $180,636 $125,650 $ 28,815
Average net assets (000).............. $274,995 $343,941 $316,372 $269,318 $208,893 $155,162 $ 79,269 $ 19,806
Ratios to average net assets: (c)
Expenses, including distribution
fees............................... .95% .98% 1.01% .88% .69% .50% .20% 0%
Expenses, excluding distribution
fees............................... .45% .48% .51% .38% .19% .10% .14% 0%
Net investment income............... 5.30% 5.02% 5.23% 5.74% 6.18% 6.50% 6.55% 6.27%(b)
Portfolio turnover.................... 37% 34% 32% 38% 116% 87% 20% 96%
<FN>
- ---------------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) Net of expense subsidy and management and/or distribution fee waiver.
(d)On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(e)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 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
--------------------------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $10.81 $10.83
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c)............... .54 .04
Net realized and unrealized gain (loss)
on investment transactions............. .17 (.02)
------ ------
Total from investment operations.... .71 .02
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.54) (.04)
Distributions from net realized gains... -- --
------ ------
Total distributions................. (.54) (.04)
------ ------
Net asset value, end of period.......... $10.98 $10.81
------ ------
------ ------
TOTAL RETURN (D):....................... 6.85% 1.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $1,502 $ 240
Average net assets (000)................ $ 790 $ 11
Ratios to average net assets: (c)
Expenses, including distribution
fee.................................. 1.20% 1.29%(b)
Expenses, excluding distribution
fee.................................. .45% .54%(b)
Net investment income................. 4.99% 5.06%(b)
Portfolio turnover...................... 37% 34%
<FN>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Net of management fee waiver.
(d)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 FOURTEEN 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. To balance the budget for the last
three years, the State has utilized nonrecurring revenues and expenditure
deferrals. The fiscal 1995 ending balances were $966 million, up from $455
originally budgeted. The fiscal 1996 budget plans a $549 million ending balance,
prior to inclusion of any lapsed appropriations. Furthermore, the fiscal 1996
budget enacts the third and final phase of the administration's multi-year 30%
personal income tax reduction, which is effective in January 1996. Spending
reductions in current and future years rely on savings from reduced costs of the
State's employee workforce. 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. See
"Investment Objectives and Policies--Special Considerations Regarding
Investments in Tax-Exempt Securities" 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 Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of management fee waivers, were .55%, .95%
and 1.20% 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, 1995, the Series paid PMF a
management fee, net of waiver, of .342 of 1% of the Series' average net assets.
See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
13
<PAGE>
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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 is Marie Conti, an Investment Associate of
Prudential Investment Advisors, a unit of PIC. Ms. Conti has responsibility for
the day-to-day management of the portfolio. Ms. Conti has managed the portfolio
since April 19, 1995 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. Ms. Conti also manages Prudential Municipal Bond Fund,
Intermediate Series and several of the other series of the Fund.
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
During the fiscal year ended August 31, 1995, PMF voluntarily waived $483,073
(.16% of average net assets) of its management fee. For the four months ended
December 31, 1994, PMF agreed to waive 25% of its management fee. For the eight
months ended August 31, 1995, PMF agreed to waive 35% of its management fee.
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.
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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, 1996.
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, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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.
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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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different 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
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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.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss
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to the extent of any capital gain distributions received by the shareholder on
shares that are held for six months or less. In addition, any short-term capital
loss will be disallowed to the extent of any tax-exempt dividends received by
the shareholder on shares that are held for six months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under 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 the Internal Revenue Code, 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. For federal income tax purposes, the
Series has a capital loss carryforward as of August 31, 1995 of approximately
$1,683,745, which expires in 2003. Accordingly, no capital gains distribution is
expected to be paid to shareholders until future net gains have been realized in
excess of such carryforward. 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
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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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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
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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.
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.
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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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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.
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.
22
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those
23
<PAGE>
acquired pursuant to the exchange privilege) may be aggregated to determine the
applicable reduction. See "Purchase and Redemption of Fund Shares--Reduction and
Waiver of Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.
OTHER WAIVERS. 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) 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
24
<PAGE>
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 such involuntary redemption.
90-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 90 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 generally 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
25
<PAGE>
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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 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
27
<PAGE>
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. 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. 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
28
<PAGE>
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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
Class A: 74435M-78-8
Class B: 74435M-79-6
Class C: 74435M-53-1
Cusip
Nos.:
PROSPECTUS
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW JERSEY SERIES)
- --------------------------------------
[LOGO]
<PAGE>
Prudential Municipal Series Fund
(New Jersey Money Market Series)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New Jersey Money Market Series)
(the "Series") is one of fourteen 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 November 1, 1995, 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 fourteen 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, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 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
(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.......................................................... .139%
---------
Total Fund Operating Expenses (Before Waiver)........................... .764%
---------
---------
</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 $24 $42 $95
The above example is based on restated data for the Series' fiscal year ended 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 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, 1995,
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 .639%, respectively, of the Series' average net assets. See
"How the Fund is Managed--Manager-- Fee Waivers."
</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>
DECEMBER 3,
YEAR ENDED AUGUST 31, 1990(A)
------------------------------------------------- THROUGH
1995 1994 1993 1992 AUGUST 31, 1991
--------- --------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.................. $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income and net realized gains (c)...... .03 .02 .02 .04 .03
Dividends and distributions to shareholders........... (.03) (.02) (.02) (.04) (.03)
--------- --------- ---------- ---------- --------
Net asset value, end of period........................ $1.00 $1.00 $1.00 $1.00 $1.00
--------- --------- ---------- ---------- --------
--------- --------- ---------- ---------- --------
TOTAL RETURN (D):..................................... 3.15% 1.90% 2.31% 3.48% 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)....................... $ 182,453 $ 158,280 $ 163,087 $ 164,092 $ 117,460
Average net assets (000).............................. $ 171,223 $ 169,123 $ 170,103 $ 155,915 $ 89,273
Ratios to average net assets (c):
Expenses, including distribution fee.............. .64% .68% .64% .32% .13%(b)
Expenses, excluding distribution fee.............. .51% .55% .51% .19% .00%(b)
Net investment income............................. 3.11% 1.87% 2.02% 3.33% 4.48%(b)
<FN>
--------------------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return 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,
1995:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $1.000600758
Value of hypothetical account at beginning of period........... 1.000000000
------------
Base period return............................................. $1.000600758
------------
------------
CURRENT YIELD (.000600758 x (365/7))........................... 3.13%+
EFFECTIVE ANNUAL YIELD, assuming weekly compounding............ 3.18%+
TAX-EQUIVALENT CURRENT YIELD (3.13% DIVIDED BY (1-43.57%)).... 5.55%+
<FN>
----------------
+After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax equivalent yield would have been 3.01%, 3.05% and 5.33%,
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, 1995 was
49 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 FOURTEEN 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
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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. To balance the budget
for the last three years, the State has utilized nonrecurring revenues and
expenditure deferrals. The fiscal 1995 ending balances were $966 million, up
from $455 million originally budgeted. The fiscal 1996 budget plans a $549
million ending balance, prior to inclusion of any lapsed appropriations.
Furthermore, the fiscal 1996 budget enacts the third and final phase of the
administration's multi-year 30% personal income tax reduction, which is
effective in January 1996. Spending reductions in current and future years rely
on savings from reduced costs of the State's employee workforce. 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. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
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
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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 Series intends to comply with applicable state blue sky laws
restricting the Series' investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of its average net assets, net of fee waiver, were .64%. 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, 1995, the Series paid a
management fee of .375 of 1% of the Series' average net assets after waiver. See
"Fee Waivers" below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 billion.
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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
Effective March 1, 1993, PMF agreed to waive 25% of its management fee. During
the fiscal year ended August 31, 1995, PMF voluntarily waived $214,029 of its
management fee (.125 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 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, 1995, 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.
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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 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. 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
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(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 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 the Internal Revenue Code, 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.
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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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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.
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.
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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, 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.
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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 (on settlement date for IRAs); 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
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
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 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
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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 the
calculation of NAV (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. See "Net Asset Value" in the Statement of Additional
Information.
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 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-Registered Trademark- 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
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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 ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command 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, maturity of a bond 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., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, 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-Registered Trademark- 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
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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 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.
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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.
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.
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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.
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.
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- 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.
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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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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.
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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...................... 19
How to Exchange Your Shares.................. 22
Shareholder Services......................... 22
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
-------------------------------------------
MF147A 444126
</TABLE>
CUSIP No: 74435M-76-2
PROSPECTUS
NOVEMBER 1,
1995
Prudential
Municipal Series Fund
(New Jersey Money Market Series)
- --------------------------------------
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Series) (the "Series")
is one of fourteen 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. Subject to the limitations
described herein, the Series may utilize derivatives, including buying and
selling futures contracts and options thereon for the purpose of hedging its
portfolio securities. 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 November 1, 1995,
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
fourteen 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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 (Before Waiver).................. .50% .50% .50%
12b-1 Fees....................................... .10++ .50 .75++
Other Expenses................................... .14 .14 .14
-- ---
---
Total Fund Operating Expenses (Before Waiver).... .74% 1.14% 1.39%
-- ---
-- ---
---
---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return
and (2) redemption at the end of
each time period:
Class A...................... $37 $ 53 $ 70 $119
Class B...................... $62 $ 66 $ 73 $122
Class C...................... $24 $ 44 $ 76 $167
You would pay the following
expenses on the same investment,
assuming no redemption:
Class A...................... $37 $ 53 $ 70 $119
Class B...................... $12 $ 36 $ 63 $122
Class C...................... $14 $ 44 $ 76 $167
The above examples are based on restated data for the Series' fiscal
year ended August 31, 1995. THE EXAMPLES 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, 1995,
without taking into account the management fee waiver. At the current level
of management fee waiver (.05%), Management Fees and Total Fund Operating
Expenses would be .45% and .69%, respectively, of the average net assets of
the Series' Class A shares, .45% and 1.09%, respectively, of the average
net assets of the Series' Class B shares and .45% and 1.34%, respectively,
of the average net assets of the Series' Class C shares. See "How the Fund
is Managed--Manager--Fee Waivers."
+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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class
A and Class C shares without such limitations would be .94% and 1.64%,
respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1995, 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,
1995 1994 1993 1992 1991 1990
---------- ---------- ------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $11.71 $12.54 $11.75 $11.08 $10.62 $10.81
---------- ---------- ------- ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
- ------------------------------
Net investment income......... .66++ .67 .70 .71 .72 .42
Net realized and unrealized
gain (loss) on investment
transactions................. .20 (.83) .79 .67 .46 (.19)
---------- ---------- ------- ------ ------ ------
Total from investment
operations................. .86 (.16) 1.49 1.38 1.18 .23
---------- ---------- ------- ------ ------ ------
LESS DISTRIBUTIONS
- ------------------------------
Dividends from net investment
income....................... (.66) (.67) (.70) (.71) (.72) (.42)
---------- ---------- ------- ------ ------ ------
Net asset value, end of
period....................... $11.91 $11.71 $12.54 $11.75 $11.08 $10.62
---------- ---------- ------- ------ ------ ------
---------- ---------- ------- ------ ------ ------
TOTAL RETURN+:................ 7.70% (1.38)% 13.06% 12.73% 11.49% 2.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $163,025 $ 13,661 $11,821 $6,057 $2,729 $1,174
Average net assets (000)...... $ 95,024 $ 13,454 $ 8,755 $4,024 $1,579 $ 588
Ratios to average net assets:
Expenses, including
distribution fee........... .69%++ .74% .74% .74% .71% .78%**
Expenses, excluding
distribution fee........... .59%++ .64% .64% .64% .61% .68%**
Net investment income....... 5.65%++ 5.46% 5.78% 6.19% 6.61% 6.41%**
Portfolio turnover rate....... 57% 49% 44% 45% 78% 127%
</TABLE>
- ------------
*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.
++Net of fee waiver.
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, 1995, 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
----------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989+ 1988 1987 1986
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
year............. $11.71 $12.54 $11.75 $11.08 $10.62 $10.88 $10.59 $10.79 $12.07 $10.88
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
- ------------------
Net investment
income........... .61# .62 .65 .66 .67 .65 .65 .71 .72 .83
Net realized and
unrealized gain
(loss) on
investment
transactions..... .20 (.83) .79 .67 .46 (.26) .29 (.20) (.81) 1.30
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations..... .81 (.21) 1.44 1.33 1.13 .39 .94 .51 (.09) 2.13
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
- ------------------
Dividends from net
investment
income........... (.61) (.62) (.65) (.66) (.67) (.65) (.65) (.71) (.72) (.83)
Distributions from
net realized
gains............ -- -- -- -- -- -- -- -- (.47) (.11)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions... (.61) (.62) (.65) (.66) (.67) (.65) (.65) (.71) (1.19) (.94)
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of year...... $11.91 $11.71 $12.54 $11.75 $11.08 $10.62 $10.88 $10.59 $10.79 $12.07
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN++:... 7.26% (1.77)% 12.61% 12.32% 10.96% 3.73% 9.33% 4.93% (0.89)% 20.53%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)....... $163,013 $331,982 $358,607 $316,472 $293,942 $313,606 $340,728 $307,458 $313,663 $246,302
Average net assets
(000)............ $230,033 $350,564 $330,823 $303,016 $295,285 $332,580 $353,225 $298,290 $299,963 $191,966
Ratios to average
net assets:
Expenses,
including
distribution
fee............ 1.11%# 1.14% 1.14% 1.14% 1.11% 1.17% 1.05% 1.10% 1.06% 1.08%
Expenses,
excluding
distribution
fee............ .61%# .64% .64% .64% .61% .67% .64% .62% .57% .60%
Net investment
income......... 5.30%# 5.06% 5.38% 5.79% 6.21% 6.10% 5.77% 6.72% 6.21% 6.90%
Portfolio turnover
rate............. 57% 49% 44% 45% 78% 127% 96% 91% 246% 131%
</TABLE>
- ------------
#Net of 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 year reported and includes reinvestment of dividends and
distributions.
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
-----------------------------
August 1,
Year ended 1994* through
August 31, August 31,
1995 1994
------------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.71 $ 11.74
------ -------------
Income from investment
operations
- -------------------------
Net investment income.... .58# .04
Net realized and
unrealized gain (loss)
on
investment
transactions............ .20 (.03)
------ -------------
Total from investment
operations.......... .78 (.01)
------ -------------
Less distributions
- -------------------------
Dividends from net
investment income....... (.58) (.04)
------ -------------
Net asset value, end of
period.................. $11.91 $11.71
------ -------------
------ -------------
TOTAL RETURN+:........... 7.00% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 529 $ 142
Average net assets
(000)................... $ 325 $ 42
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.36%# 1.62%**
Expenses, excluding
distribution fee...... .61%# .87%**
Net investment
income................ 5.05%# 5.17%**
Portfolio turnover
rate.................... 57% 49%
</TABLE>
- ------------
#Net of fee waiver.
*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 each period reported and includes reinvestment of
dividends. Total returns for periods of less than a full year are not
annualized.
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 FOURTEEN 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 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.
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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 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
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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 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).
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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.
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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 State's economic recovery, however,
weakened by mid-1994, and the 1994-1995 General Fund deficit was approximately
$241 million. Projections for 1996 anticipate a weaker State and national
economy than 1995. 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
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).
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 Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. The investment
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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, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .69%, 1.11% and 1.36%
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, 1995, the Series paid PMF a
management fee of .47 of 1% of the Series' average net assets. See "Fee Waivers"
below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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 Patricia Dolan, a Managing
Director of Prudential Investment Advisors, a unit of PIC. Ms. Dolan has
responsibility for the day-to-day management of the portfolio. Ms. Dolan has
managed the portfolio since April 19, 1995 and has been employed by PIC as a
portfolio manager since October 1991. She was formerly a Vice President and
Portfolio Manager in the Municipal Trust Department of Citibank Private Banking
Division where she was employed from 1981 to 1991. Ms. Dolan also serves as the
portfolio manager of Prudential National Municipals Fund, Inc. and the
Prudential Municipal Bond Fund, Insured Series.
PMF and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
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FEE WAIVERS
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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 .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, 1996.
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
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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, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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,
15
<PAGE>
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) exchanges of Class B
or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under New York law, dividends paid by the Series are exempt from New York
State and New York City income taxes for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
18
<PAGE>
WITHHOLDING TAXES
Under the Internal Revenue Code, 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, 1995, of approximately
$927,200. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
The Series elected to treat net capital losses of approximately $531,600
incurred in the ten-month period ended August 31, 1994 as having occurred in the
current fiscal year. 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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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 the
caculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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).
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<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.
OTHER WAIVERS. 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
23
<PAGE>
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) 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 such involuntary redemption.
90-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 90 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 generally 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 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
27
<PAGE>
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. 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. 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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................... 27
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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW YORK SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL
MUNICIPAL SERIES FUND
(NEW YORK INCOME SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Income Series) (the
"Series") is one of fifteen 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 November 1,
1995, 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
fifteen 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price).................... 3%
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested
Dividends.......................... None
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' current fiscal year. 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, 1996.
</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 FIFTEEN 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 State's economic recovery, however,
weakened by mid-1994, and the 1994-1995 General Fund deficit was approximately
$241 million. Projections for 1996 anticipate a weaker State and national
economy than 1995. 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investment in Tax-Exempt Securities"
in the Statement of Additional Information.
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).
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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 Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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.
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As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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.
[INSERT PORTFOLIO MANAGER WHEN IDENTIFIED]
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, 1996 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, 1996, 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.
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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 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 distribution and service fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts, 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. 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
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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,
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<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 the Internal Revenue Code, 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.
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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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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.
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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.
OTHER WAIVERS. 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) 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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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
18
<PAGE>
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
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
19
<PAGE>
PURCHASE CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING
SHARES BY WIRE OR BY CERTIFIED OR OFFICIAL BANK CHECKS.
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.
90-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 90 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 generally 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
N O V E M B E R 1,
1 9 9 5
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NEW YORK INCOME SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK MONEY MARKET SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (New York Money Market Series)
(the "Series") is one of fourteen 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 November 1, 1995, 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 fourteen 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, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 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 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..................................... .105%
-----
Total Fund Operating Expenses...................... .730%
-----
-----
</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:....................................... $ 7 $ 23 $ 41 $ 91
The above example is based on data for the Series' fiscal year ended 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 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, 1995, 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,
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989++ 1988 1987 1986
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year....... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
Net investment income and
net realized gains...... .03 .02 .02 .03 .04 .05 .05 .04 .04+ .05+
Dividends and
distributions to
shareholders............ (.03) (.02) (.02) (.03) (.04) (.05) (.05) (.04) (.04) (.05)
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
Net asset value, end of
year.................... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
------- ------- ------- ------- ------- ------- ------- ------- -------- --------
TOTAL RETURN+++:......... 3.06% 1.80% 1.80% 2.93% 4.37% 5.14% 5.14% 4.14% 3.66% 4.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................... $324,698 $269,073 $286,304 $249,785 $236,361 $226,758 $184,615 $168,391 $134,317 $115,738
Average net assets
(000)................... $292,763 $280,492 $275,640 $248,557 $245,494 $218,423 $173,661 $154,746 $139,263 $71,956
Ratios to average net
assets:
Expenses, including
distribution fee.... .73% .77% .75% .76% .79% .75% .79% .72% .71%+ .57%+
Expenses, excluding
distribution fee.... .61% .64% .63% .63% .66% .62% .67% .60% .59%+ .45%+
Net investment
income.............. 3.02% 1.78% 1.75% 2.83% 4.23% 4.99% 5.01% 4.18% 3.53%+ 4.17%+
<FN>
- ------------------
+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 includes reinvestment of dividends and distributions.
</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,
1995:
<TABLE>
<S> <C>
Value of hypothetical account at end of period......... $1.000578603
Value of hypothetical account at beginning of period... 1.000000000
------------
Base period return..................................... $ .000578603
------------
------------
CURRENT YIELD (.000578603 X (365/7))................... 3.02%
EFFECTIVE ANNUAL YIELD, assuming daily compounding..... 3.06%
TAX-EQUIVALENT CURRENT YIELD (3.02% DIVIDED BY
(1-44.36%))........................................... 5.43%
</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, 1995 was 64 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 FOURTEEN 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 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
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 State's economic recovery,
however, weakened by mid-1994, and the 1994-1995 General Fund deficit was
approximately $241 million. Projections for 1996 anticipate a weaker State and
national economy than 1995. 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
8
<PAGE>
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. See "Investment Objectives and Policies
- -- Special Considerations Regarding Investments in Tax-Exempt Securities" 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 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 Series intends to comply with applicable state blue sky laws
restricting the Series' investments in illiquid securities. See "Investment
Restrictions" in the Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of its average net assets were .73%. See "Financial Highlights."
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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, 1995, 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, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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, 1995, 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.
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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. 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. 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,
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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 the Internal Revenue Code, 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.
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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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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. 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.
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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.
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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 (on settlement date for IRAs); 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
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
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 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 the
calculation of NAV (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. See "Net Asset Value" in the Statement of Additional
Information.
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
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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-Registered Trademark- 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 ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
Command 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, maturity of a bond 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., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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...................... 9
HOW THE FUND IS MANAGED........................ 9
Manager...................................... 10
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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL SERIES
FUND
(NEW YORK MONEY MARKET SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NORTH CAROLINA SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (North Carolina Series) (the
"Series") is one of fourteen 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. Subject to
the limitations described herein, the Series may utilize derivatives, including
buying and selling futures contracts and options thereon for the purpose of
hedging its portfolio securities. 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 November 1,
1995, 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 fourteen 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, 1995,
PMF served as manager or administrator to 69 investment companies, including
38 mutual funds, with aggregate assets of approximately $51 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 (Before Waiver).......... .50% .50% .50%
12b-1 Fees............................... .10++ .50 .75++
Other Expenses........................... .39 .39 .39
--- --- ---
Total Fund Operating Expenses (Before 1.39% 1.64%
Waiver)................................. .99%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following
expenses on a $1,000 investment,
assuming (1) 5% annual return and
(2) redemption at the end of each
time period:
Class A........................ $40 $ 61 $ 83 $148
Class B........................ $64 $ 74 $ 86 $141
Class C........................ $27 $ 52 $ 89 $194
You would pay the following
expenses on the same investment,
assuming no redemption:
Class A........................ $40 $ 61 $ 83 $148
Class B........................ $14 $ 44 $ 76 $151
Class C........................ $17 $152 $ 89 $194
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1995. THE EXAMPLES 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, 1995,
without taking into account the management fee waiver. At the current level
of management fee waiver (.05%), Management Fees and Total Fund Operating
Expenses would be .45% and .94%, respectively, of the average net assets of
the Series' Class A shares, .45% and 1.34%, respectively, of the average
net assets of the Series' Class B shares and .45% and 1.59%, respectively,
of the average net assets of the Series' Class C shares. See "How the Fund
is Managed--Manager--Fee Waivers."
+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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class
A and Class C shares without such limitations would be 1.19% and 1.89%,
respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1995, 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 (A)
AUGUST 31, THROUGH
------------------------------------------ AUGUST 31,
1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $11.06 $12.04 $11.37 $10.86 $10.45 $10.63
------ ------ ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .60(d) .61 .65 .67 .67 .41
Net realized and unrealized
gain (loss) on investment
transactions................. .13 (.76) .67 .51 .41 (.18)
------ ------ ------ ------ ------ -----------
Total from investment
operations............... .73 (.15) 1.32 1.18 1.08 .23
------ ------ ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income....................... (.60) (.61) (.65) (.67) (.67) (.41)
Distributions from net
realized gains............... -- (.22) -- -- -- --
------ ------ ------ ------ ------ -----------
Total distributions....... (.60) (.83) (.65) (.67) (.67) (.41)
------ ------ ------ ------ ------ -----------
Net asset value, end of
period....................... $11.19 $11.06 $12.04 $11.37 $10.86 $10.45
------ ------ ------ ------ ------ -----------
------ ------ ------ ------ ------ -----------
TOTAL RETURN (C):............. 6.86% (1.35)% 11.99% 11.12% 10.63% 2.09%
RATIOS/SUPPLEMENTAL DATA:
Net asset, end of period
(000)........................ $26,519 $2,256 $1,777 $ 917 $ 362 $ 58
Average net assets (000)...... $15,244 $2,067 $1,316 $ 612 $ 246 $ 32
Ratios to average net assets:
Expenses, including
distribution fee........... .98%(d) .88% .87% .91% .99% 1.00%(b)
Expenses, excluding
distribution fee........... .88%(d) .78% .77% .81% .89% .90%(b)
Net investment income....... 5.25%(d) 5.31% 5.55% 5.90% 6.24% 6.24%(b)
Portfolio turnover............ 28% 17% 38% 36% 27% 24%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c)Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Net of management fee waiver.
</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, 1995, 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
----------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------------------------
1989
1995 1994 1993 1992 1991 1990 (B) 1988 1987 1986
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year............... $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $10.35 $ 10.59 $ 11.32 $ 10.04
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .55(d) .56 .60 .62 .63 .64 .65 .69(a) .70(a) .78(a)
Net realized and
unrealized gain
(loss) on
investment
transactions....... .13 (.77) .68 .51 .41 (.20) .30 (.24) (.61) 1.31
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations..... .68 (.21) 1.28 1.13 1.04 .44 .95 .45 .09 2.09
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income.. (.55) (.56) (.60) (.62) (.63) (.64) (.65) (.69) (.70) (.78)
Distributions from
net realized
gains.............. -- (.22) -- -- -- -- -- -- (.12) (.03)
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions... (.55) (.78) (.60) (.62) (.63) (.64) (.65) (.69) (.82) (.81)
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year............ $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $10.65 $ 10.35 $ 10.59 $ 11.32
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
---------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN (C):... 6.44% (1.82)% 11.62% 10.64% 10.17% 4.28% 9.39% 4.47% .74% 21.61%
RATIOS/SUPPLEMENTAL
DATA:
Net asset, end of
year (000)......... $ 40,119 $69,448 $75,515 $63,573 $59,875 $57,429 $34,222 $44,076 $39,477 $25,395
Average net assets
(000).............. $ 51,963 $73,606 $67,997 $60,751 $59,071 $56,745 $49,868 $40,442 $35,368 $17,261
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.34%(d) 1.28% 1.27% 1.31% 1.39% 1.38% 1.39% 1.13%(a) 1.06%(a) 1.00%(a)
Expenses,
excluding
distribution
fee.............. .84%(d) .78% .77% .81% .89% .89% .89% .64%(a) .57%(a) .52%(a)
Net investment
income........... 5.10%(d) 4.89% 5.18% 5.58% 5.88% 5.96% 6.06% 6.58%(a) 6.15%(a) 6.72%(a)
Portfolio
turnover........... 28% 17% 38% 36% 27% 24% 47% 66% 37% 34%
<FN>
- ---------------
(a)Net of expense subsidy.
(b)On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as manager of the Fund.
(c)Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(d)Net of management fee waiver.
</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
-------------------------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
----------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.06 $ 11.09
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .52(d) .04
Net realized and unrealized gain (loss)
on investment transactions............. .13 (.03)
------ ------
Total from investment operations.... .65 .01
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.52) (.04)
Distributions from net realized gains... -- --
------ ------
Total distributions................. (.52) (.04)
------ ------
Net asset value, end of period.......... $11.19 $11.06
------ ------
------ ------
TOTAL RETURN (C):....................... 6.17% .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 53 $ 10
Average net assets (000)................ $ 32 $ 5
Ratios to average net assets:
Expenses, including distribution
fee.................................. 1.63%(d) 1.67%(b)
Expenses, excluding distribution
fee.................................. .88%(d) .92%(b)
Net investment income................. 4.59%(d) 5.06%(b)
Portfolio turnover...................... 28% 17%
<FN>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c)Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Net of management fee waiver.
</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 FOURTEEN 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.
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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
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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. The State had a budget surplus of approximately $865 million at the end of
fiscal year 1993-1994. Because of growth in State tax and fee revenues, the
General Fund balance at the end of fiscal year 1994-1995 was reported at
approximately $300 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. See
"Investment Objectives and Policies--Special Considerations Regarding
Investments in Tax-Exempt Securities" 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).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
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ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .98%, 1.34% and 1.63%
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, 1995, the Series paid PMF a
management fee of .47 of 1% of the Series' average net assets. See "Fee Waivers"
below and "Manager" in the Statement of Additional Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PMF continues to have responsibility for all investment
advisory services and supervises PIC's performance of such services.
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The current portfolio manager of the Series is Marie Conti, an Investment
Associate of Prudential Investment Advisors, a unit of PIC. 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
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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 .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, 1996.
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
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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, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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
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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.
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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 the Internal Revenue Code, 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 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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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:
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<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.
OTHER WAIVERS. 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
23
<PAGE>
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) 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 such involuntary redemption.
90-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 90 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 generally 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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 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
27
<PAGE>
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. 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. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B and Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
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 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(NORTH CAROLINA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(OHIO SERIES)
- ----------------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Ohio Series) (the "Series") is
one of fourteen 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. Subject to the limitations described herein, the Series may
utilize derivatives, including buying and selling futures contracts and options
thereon for the purpose of hedging its portfolio securities. 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 November 1, 1995,
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
fourteen 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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 (Before Waiver)....... .50% .50% .50%
12b-1 Fees............................ .10++ .50 .75++
Other Expenses........................ .26 .26 .26
---- ---- -----
Total Fund Operating Expenses (Before
Waiver).............................. .86% 1.26% 1.51%
---- ---- -----
---- ---- -----
</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 $ 76 $ 133
Class B................................................................ $ 63 $ 70 $ 79 $ 136
Class C................................................................ $ 25 $ 48 $ 82 $ 180
You would pay the following expenses on the same investment, assuming no
redemption:
Class A................................................................ $ 39 $ 57 $ 76 $ 133
Class B................................................................ $ 13 $ 40 $ 69 $ 136
Class C................................................................ $ 15 $ 48 $ 82 $ 180
The above examples are based on restated data for the Series' fiscal year ended August 31, 1995. THE
EXAMPLES 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, 1995, without taking into account
the management fee waiver. At the current level of management fee waiver (.05%), Management Fees and
Total Fund Operating Expenses would be .45% and .81%, respectively, of the average net assets of the
Series' Class A shares, .45% and 1.21%, respectively, of the average net assets of the Series' Class
B shares and .45% and 1.46%, respectively, of the average net assets of the Series' Class C shares.
See "How the Fund is Managed--Manager--Fee Waivers."
+ 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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class A and
Class C shares without such limitations would be 1.06% and 1.76%, respectively. See "How the Fund is
Managed-- Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period
ended August 31, 1995, 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,
1995 1994 1993 1992 1991 1990
--------- -------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.72 $ 12.38 $11.69 $11.17 $10.71 $ 10.85
--------- -------- ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .65# .66 .69 .70 .70 .47
Net realized and
unrealized gain (loss)
on investment
transactions............ .20 (.66) .69 .52 .46 (.14)
--------- -------- ------ ------ ------ -----------
Total from investment
operations.......... .85 -- 1.38 1.22 1.16 .33
--------- -------- ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.65) (.66) (.69) (.70) (.70) (.47)
--------- -------- ------ ------ ------ -----------
Net asset value, end of
period.................. $ 11.92 $ 11.72 $12.38 $11.69 $11.17 $ 10.71
--------- -------- ------ ------ ------ -----------
--------- -------- ------ ------ ------ -----------
TOTAL RETURN+:........... 7.59% (0.01)% 12.12% 11.26% 11.06% 2.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 51,132 $ 4,749 $4,647 $2,095 $923 $462
Average net assets
(000)................... $ 29,904 $ 4,733 $2,904 $1,289 $615 $289
Ratios to average net
assets:
Expenses, including
distribution fee...... .83%# .84% .84% .81% .93% .96%**
Expenses, excluding
distribution fee...... .73%# .74% .74% .71% .83% .86%**
Net investment
income................ 5.50%# 5.45% 5.73% 6.34% 6.34% 6.51%**
Portfolio turnover
rate.................... 38% 20% 28% 37% 37% 24%
<FN>
- ------------
# Net of fee waiver.
* 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, 1995, 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
------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989++ 1988 1987 1986
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year............... $ 11.73 $ 12.38 $11.70 $ 11.18 $ 10.71 $ 10.85 $10.53 $ 10.89 $ 11.70 $10.69
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............. .60# .61 .65 .65 .65 .66 .67 .71 .74+ .82+
Net realized and
unrealized gain
(loss) on
investment
transactions....... .20 (.65) .68 .52 .47 (.14) .32 (.36) (.66) 1.14
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
Total from
investment
operations..... .80 (.04) 1.33 1.17 1.12 .52 .99 .35 .08 1.96
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment
income............. (.60) (.61) (.65) (.65) (.65) (.66) (.67) (.71) (.74) (.82)
Distributions from
net realized
gains.............. -- -- -- -- -- -- -- -- (.15) (.13)
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
Total
distributions... (.60) (.61) (.65) (.65) (.65) (.66) (.67) (.71) (.89) (.95)
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
Net asset value, end
of year............ $ 11.93 $ 11.73 $12.38 $11.70 $11.18 $10.71 $10.85 $10.53 $10.89 $11.70
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
------- ------- ------ ------- ------- ------- ------- -------- -------- --------
TOTAL RETURN+++:.... 7.16% (0.33)% 11.58% 10.79% 10.74% 4.87% 9.68% 3.52% 0.64% 19.34%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)......... $62,805 $118,270 $121,937 $102,199 $92,572 $89,183 $87,426 $73,972 $75,833 $51,587
Average net assets
(000).............. $85,410 $121,365 $110,053 $96,178 $90,437 $89,302 $81,613 $72,333 $69,995 $38,725
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.22%# 1.24% 1.24% 1.21% 1.33% 1.32% 1.32% 1.24% 1.15%+ 1.13%+
Expenses,
excluding
distribution
fee.............. .72%# .74% .74% .71% .83% .84% .84% .75% .66%+ .65%+
Net investment
income........... 5.27%# 5.05% 5.33% 5.73% 5.94% 6.08% 6.17% 6.79% 6.43%+ 6.98%+
Portfolio turnover
rate............... 38% 20% 28% 37% 37% 24% 41% 127% 120% 50%
<FN>
- ------------
# Net of fee waiver.
+ 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 year reported and includes reinvestment of dividends and
distributions.
</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
----------------------------
AUGUST 1,
YEAR ENDED 1994* THROUGH
AUGUST 31, AUGUST 31,
1995 1994
------------- -------------
<S> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 11.73 $ 11.75
------ ------
INCOME FROM INVESTMENT
OPERATIONS
- -------------------------
Net investment income.... .57# .05
.20
Net realized and
unrealized gain (loss)
on
investment
transactions............ (.02)
------ ------
Total from investment
operations.......... .77 .03
LESS DISTRIBUTIONS
- -------------------------
Dividends from net
investment income....... (.57) (.05)
------ ------
- -------------------------
Net asset value, end of
period.................. $ 11.93 $ 11.73
------ ------
------ ------
TOTAL RETURN+:........... 6.89% 0.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 126 $5
Average net assets
(000)................... $ 61 $2
Ratios to average net
assets:
Expenses, including
distribution fee...... 1.49%# 2.28%**
Expenses, excluding
distribution fee...... .74%# 1.53%**
Net investment
income................ 4.76%# 4.73%**
Portfolio turnover
rate.................... 38% 20%
<FN>
- ------------
# Net of fee waiver.
* 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 each period reported and includes reinvestment of dividends.
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 FOURTEEN 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 municipal and school district income taxes in Ohio
for resident individuals to the extent they are properly attributable to
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
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 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
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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 State's 1994-95 biennium ended June 30,
1995 with a General Revenue Fund (GRF) ending balance of $928 million, of which
$535.2 million has been transferred into the State's Budget Stabilization Fund,
a cash and budgetary management fund (which had an October 3, 1995 balance of
over $828 million). In accordance with the GRF appropriations act for the
1995-96 biennium passed on June 28, 1995 and promptly signed (after selective
vetoes) by the Governor, the significant June 30, 1995 GRF balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, was
transferred to other funds, including school assistance funds and, in
anticipation of possible federal program changes, a human services stabilization
fund. All necessary GRF appropriations for State debt service and lease rental
payments then projected for the 1995-96 biennium were included in that
appropriations act. 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
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).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
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PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .83%, 1.22% and 1.49%
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, 1995, the Series paid PMF a
management fee, net of waiver, of .47 of 1% of the Series' average net assets.
See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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.
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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, a unit of PIC. 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 and PIC are wholly-owned subsidiaries of The Prudential Insurance Company
of America (Prudential), a major diversified insurance and financial services
company.
FEE WAIVERS
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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
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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, 1996.
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, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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.
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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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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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."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
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 the Internal Revenue Code, 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 dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each such class will bear its own distribution
charges, generally resulting in lower dividends for the Class B and Class C
shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you
19
<PAGE>
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
Connecticut Money Market Series, Florida Series, Hawaii Income Series, Maryland
Series, Massachusetts Series, Massachusetts Money Market Series, Michigan
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.
20
<PAGE>
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain 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.
21
<PAGE>
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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 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>
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.
OTHER WAIVERS. 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) 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
24
<PAGE>
OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH
REQUEST WILL BE ACCEPTED. All correspondence and documents concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares" If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-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 90 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
25
<PAGE>
the redemption resulted in a loss, some or all of the loss, depending on the
amount reinvested, will generally not be allowed for federal income tax
purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
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.
26
<PAGE>
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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
27
<PAGE>
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 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. 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. 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 Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(OHIO SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(PENNSYLVANIA SERIES)
- ----------------------------------------------------------------------
PROSPECTUS DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the "Fund") (Pennsylvania Series)
(the "Series") is one of fourteen 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. Subject to
the limitations described herein, the Series may utilize derivatives, including
buying and selling futures contracts and options thereon for the purpose of
hedging its portfolio securities. 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 November 1,
1995, 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
fourteen 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, 1995, PMF served as
manager or administrator to 69 investment companies, including 38 mutual funds,
with aggregate assets of approximately $51 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 (Before Waiver)............... .50% .50% .50%
12b-1 Fees.................................... .10++ .50 .75++
Other Expenses................................ .21 .21 .21
---- ---- ----
Total Fund Operating Expenses (Before 1.21%
Waiver)...................................... .81% 1.46%
---- ---- ----
---- ---- ----
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A........................................ $38 $55 $74 $127
Class B........................................ $62 $68 $76 $130
Class C........................................ $25 $46 $80 $175
You would pay the following expenses on the same
investment, assuming no redemption:
Class A........................................ $38 $55 $74 $127
Class B........................................ $12 $38 $66 $130
Class C........................................ $15 $46 $80 $175
The above examples are based restated on data for the Series' fiscal year ended
August 31, 1995. THE EXAMPLES 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, 1995, without taking into account the
management fee waiver. At the current level of management fee waiver (.05%), Management Fees and Total
Fund Operating Expenses would be .45% and .76%, respectively, of the average net assets of the Series'
Class A shares, .45% and 1.16%, respectively, of the average net assets of the Series' Class B shares and
.45% and 1.41%, respectively, of the average net assets of the Series' Class C shares. See "How the Fund
is Managed--Manager--Fee Waivers."
+ 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, 1996. Total Fund Operating Expenses (Before Waiver) of the Class A and Class C shares without such
limitations would be 1.01% and 1.71%, respectively. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights, with respect to the five-year period ended
August 31, 1995, 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 (A)
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period..... $ 10.42 $ 11.21 $ 10.55 $ 9.96 $ 9.60 $ 9.83
-------- -------- -------- -------- -------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.... .60(c) .59 .62 .62 .62(c) .38(c)
Net realized and
unrealized gain (loss)
on investment
transactions............ .13 (.68) .70 .59 .39 (.23)
-------- -------- -------- -------- -------- -----------
Total from investment
operations.......... .73 (.09) 1.32 1.21 1.01 .15
-------- -------- -------- -------- -------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.60) (.59) (.62) (.62) (.62) (.38)
Distributions from net
realized gains.......... -- (.11) (.04) -- (.03) --
-------- -------- -------- -------- -------- -----------
Total
distributions....... (.60) (.70) (.66) (.62) (.65) (.38)
-------- -------- -------- -------- -------- -----------
Net asset value, end of
period.................. $ 10.55 $ 10.42 $ 11.21 $ 10.55 $ 9.96 $ 9.60
-------- -------- -------- -------- -------- -----------
-------- -------- -------- -------- -------- -----------
TOTAL RETURN (D):........ 7.35% (.82)% 12.86% 12.44% 10.82% 1.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 50,696 $ 10,651 $ 9,342 $ 5,908 $ 3,521 $ 1,823
Average net assets
(000)................... $ 30,092 $ 10,315 $ 7,354 $ 4,439 $ 2,366 $ 977
Ratios to average net
assets:
Expenses, including
distribution fee...... .80%(c) .75% .78% .81% .83%(c) .78%(b)(c)
Expenses, excluding
distribution fee...... .70%(c) .65% .68% .71% .74%(c) .68%(b)(c)
Net investment
income................ 5.76%(c) 5.52% 5.69% 5.99% 6.32%(c) 6.51%(b)(c)
Portfolio turnover....... 19% 22% 13% 25% 62% 37%
<FN>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of expense subsidy/management fee waiver.
(d) 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, 1995, 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(D)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------------------------- AUGUST 31,
1995 1994 1993 1992 1991 1990 1989 (B) 1988 1987
-------- -------- -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
period......... $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47 $ 9.73 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- ----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income......... .56(a) .55 .57 .58 .58(a) .61(a) .65(a) .67(a) .26(a)
Net realized and
unrealized gain
(loss) on
investment
transactions... .13 (.68) .71 .58 .39 (.21) .34 (.26) (.27)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Total from
investment
operations... .69 (.13) 1.28 1.16 .97 .40 .99 .41 (.01)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
LESS
DISTRIBUTIONS
Dividends from
net investment
income......... (.56) (.55) (.57) (.58) (.58) (.61) (.65) (.67) (.26)
Distributions
from net
realized
gains.......... -- (.11) (.04) -- (.03) -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Total
distributions... (.56) (.66) (.61) (.58) (.61) (.61) (.65) (.67) (.26)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Net asset value,
end of
period......... $ 10.55 $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $ 9.81 $ 9.47 $ 9.73
-------- -------- -------- -------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- -------- -------- -------- ----------
TOTAL RETURN
(C):........... 6.92% (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).......... $202,633 $257,732 $263,752 $206,028 $170,162 $150,824 $118,280 $ 52,503 $ 16,340
Average net
assets (000)... $223,082 $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.......... 1.17%(a) 1.15% 1.18% 1.21% 1.23%(a) 1.02%(a) .77%(a) .53%(a) 0%(a)(e)
Expenses,
excluding
distribution
fee.......... .67%(a) .65% .68% .71% .74%(a) .53%(a) .29%(a) .06%(a) 0%(a)(e)
Net investment
income....... 5.44%(a) 5.11% 5.29% 5.59% 5.94%(a) 6.05%(a) 6.27%(a) 6.66%(a) 5.54%(a)(e)
Portfolio
turnover....... 19% 22% 13% 25% 62% 37% 11% 137% 42%
<FN>
- ---------------
(a) Net of expense subsidy/management fee waiver.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(d) Commencement of offering of Class B shares.
(e) Annualized.
</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
----------
AUGUST 1,
1994 (A)
YEAR ENDED THROUGH
AUGUST 31, AUGUST 31,
1995 1994
----------- ----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.42 $ 10.44
----------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .53(d) .04
Net realized and unrealized gain (loss) on
investment transactions.......................... .13 (.02)
----------- ----------
Total from investment operations.............. .66 .02
----------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.53) (.04)
Distributions from net realized gains............. -- --
----------- ----------
Total distributions........................... (.53) (.04)
----------- ----------
Net asset value, end of period.................... $ 10.55 $ 10.42
----------- ----------
----------- ----------
TOTAL RETURN (C):................................. 6.65% .14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 336 $ 90
Average net assets (000).......................... $ 223 $ 1
Ratios to average net assets:#
Expenses, including distribution fee............ 1.44%(d) 2.00%(b)
Expenses, excluding distribution fee............ .69%(d) 1.25%(b)
Net investment income........................... 5.14%(d) 8.51%(b)
Portfolio turnover................................ 19% 22%
<FN>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods less than a full year are not
annualized.
(d) Net of management fee waiver.
</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 FOURTEEN 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 personal income taxes 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 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 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
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correlation may be affected by additions to or deletions from the index which
serves as the basis for a futures contract. Finally, if the price of the
security that is subject to the hedge were to move in a favorable direction, the
advantage to the Series would be partially offset by the loss incurred on the
futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN 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. A substantial tax increase enacted for
fiscal 1992 brought financial stability to Pennsylvania's General Fund. That tax
increase included several taxes with retroactive effective dates which generated
some one-time revenues during fiscal 1992. The absence of those revenues and a
reduction in the personal income tax rate in fiscal 1993 contributed to a
decline in tax revenues. Fiscal 1994 tax revenues increased by 4.1%, but a
decline in other revenues caused by the end of medical assistance pooled
financing in fiscal 1993 held total revenues to a 1.8% gain. Expenditures and
other uses increased in fiscal 1994 by 4.3%, reducing the Commonwealth's
operating surplus. Commonwealth revenues for fiscal 1995 (determined on a
budgetary basis) were above estimate and exceeded fiscal year expenditures and
encumbrances. Receipts were 4.3% over collections for fiscal 1994 and
expenditures increased by 5% over spending for fiscal 1994. The fiscal 1996
budget, which includes some tax reductions, provides for an increase in spending
of 2.7%. 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. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
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).
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes. The Series may pledge up to 20% of the value of its total
assets to secure these borrowings. The Series will not purchase portfolio
securities if its borrowings exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
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ILLIQUID SECURITIES
The Series may invest up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities,
including municipal lease obligations, that have a readily available market are
not considered illiquid for the purposes of this limitation. The Series intends
to comply with applicable state blue sky laws restricting the Series'
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. 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, 1995, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .80%, 1.17% and 1.44%
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, 1995, the Series paid PMF a
management fee, net of waiver, of .47 of 1% of the Series' average net assets.
See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
As of September 30, 1995, PMF served as the manager to 38 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 31 closed-end investment companies with aggregate assets of
approximately $51 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 Peter J. Allegrini, a Managing
Director of Prudential Investment Advisors, a unit of PIC. Mr. Allegrini has
responsibility for the day-to-day management of the portfolio. Mr. Allegrini has
managed the portfolio
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since April 19, 1995 and has been employed by PIC as a portfolio manager since
July 1994. From 1982 to 1986, he was employed by Fidelity Investments as a
senior bond analyst and from 1986 to 1994, he was a portfolio manager, most
recently of Fidelity Advisor High Income Municipal Fund. Mr. Allegrini also
serves as the portfolio manager of Prudential Municipal Bond Fund, High Yield
Series.
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
Effective January 1, 1995, PMF agreed to waive 10% of its management fee. 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 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 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, 1996.
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UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1996. 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, 1995, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% 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 distribution and service
fees 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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.
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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.
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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"
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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.
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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.
Shares of the Series will be exempt from Pennsylvania county personal property
taxes to the extent the Series' portfolio securities consist of Pennsylvania
Obligations on the annual assessment date.
WITHHOLDING TAXES
Under the Internal Revenue Code, 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, 1995 as having been incurred in the current 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 and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Hawaii
19
<PAGE>
Income Series, Maryland Series, Massachusetts Series, Massachusetts Money Market
Series, Michigan 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 the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
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.
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.
22
<PAGE>
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions during which the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF 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.
OTHER WAIVERS. 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) 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.
23
<PAGE>
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in
24
<PAGE>
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the net asset value of the Fund during any 90-day period for any one
shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-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 90 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 generally not be allowed for
federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares."
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
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>
25
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in 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. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
The first conversion of Class B shares occurred in February 1995, when the
conversion feature was first implemented.
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
26
<PAGE>
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 may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
27
<PAGE>
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. 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. Eligibility for this exchange privilege will
be calculated on the business day prior to the date of the exchange. Amounts
representing Class B or Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions, (2)
amounts representing the increase in the net asset value above the total amount
of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are
automatically reinvested in full and fractional shares of the Series at NAV
without a sales charge. You may direct the Transfer Agent in writing not
less than 5 full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. If you
hold shares through Prudential Securities, you should contact your financial
adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Series' shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account
(including a Command Account). For additional information about this
service, you may contact your Prudential Securities financial adviser,
Prusec representative or the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder
report and annual prospectus per household. You may request additional
copies of such reports by calling (800) 225-1852 or by writing to the Fund
at One Seaport Plaza, New York, New York 10292. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
28
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income 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
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Hawaii Income Series
Maryland Series
Massachusetts Series
Michigan 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 Limited Maturity Fund, Inc.
Global Assets Portfolio
Limited Maturity Portfolio
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Balanced Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential Jennison Fund, Inc.
Prudential Multi-Sector 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
NOVEMBER 1,
1995
PRUDENTIAL
MUNICIPAL
SERIES FUND
(PENNSYLVANIA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
- ------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 1, 1995
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company, or mutual fund, consisting of fourteen series-- the
Connecticut Money Market Series, the Florida Series, the Hawaii Income Series,
the Maryland Series, the Massachusetts Series, the Massachusetts Money Market
Series, the Michigan Series, the New Jersey Series, the New Jersey Money Market
Series, the New York Series, the New York Money Market Series, the North
Carolina Series, the Ohio Series and the Pennsylvania Series. A fifteenth
series, the New York Income Series, is not currently being offered. The
objective of each series, other than the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series (collectively, the money market series), is to seek
to provide to shareholders who are residents of the respective state the maximum
amount of income that is exempt from federal and applicable state income taxes
and, in the case of the New York Series and the New York Income Series, also New
York City income taxes, consistent with the preservation of capital, and, in
conjunction therewith, the series may invest in debt securities with the
potential for capital gain. The objective of the money market series is to seek
to provide the highest level of current income that is exempt from federal and
applicable state income taxes and, in the case of the New York Money Market
Series, also New York City income taxes, consistent with liquidity and the
preservation of capital. All of the series are diversified except the Florida
Series, the Hawaii Income Series, the New York Income Series, and the money
market series, other than the New York Money Market Series. There can be no
assurance that any series' investment objective will be achieved. See
"Investment Objectives and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses of each series of the Fund dated November
1, 1995, copies of which may be obtained from the Fund upon request.
- --------------------------------------------------------------------------------
117B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-References to Pages in Series Prospectuses
-------------------------------------------------------------------------
Connecticut Massachusetts
Money Hawaii Money
Page Market Florida Income Maryland Massachusetts Market Michigan
---- ----------- ------- ------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
General Information........... B-1 15 20 17 20 20 15 19
Investment Objectives and
Policies..................... B-1 6 8 6 8 8 6 8
In General.................. B-1 -- -- -- -- -- --
Tax-Exempt Securities....... B-3 6 8 6 8 8 7 8
Risks of Investing in
Defaulted Securities....... B-4 -- -- 6 -- -- -- --
Special Considerations
Regarding Investments in
Tax-Exempt Securities...... B-5 9 12 9 12 12 9 12
Floating Rate and Variable
Rate Securities............ B-15 7 8 6 8 8 7 8
Put Options................. B-15 8 10 7 10 10 8 10
Financial Futures Contracts
and Options Thereon........ B-16 -- 11 8 10 10 -- 10
When-Issued and Delayed
Delivery Securities........ B-18 8 10 8 10 10 8 10
Portfolio Turnover.......... B-19 -- 13 10 13 12 -- 12
Illiquid Securities......... B-19 10 13 10 13 13 10 13
Repurchase Agreements....... B-20 9 12 10 12 12 9 12
Investment Restrictions....... B-20 10 13 11 13 13 10 13
Trustees and Officers......... B-22 10 13 11 13 13 10 13
Manager....................... B-27 10 13 11 13 13 10 13
Distributor................... B-31 11 14 12 14 14 11 14
Portfolio Transactions and
Brokerage.................... B-35 12 16 14 16 16 12 16
Purchase and Redemption of
Fund Shares.................. B-37 16 21 19 21 21 16 21
Specimen Price Make-Up...... B-38 -- -- -- -- -- --
Reduction and Waiver of
Initial Sales
Charges--Class A Shares.... B-38 -- 24 21 23 23 -- 23
Waiver of the Contingent
Deferred Sales
Charge--Class B Shares..... B-40 -- 27 24 26 26 -- 26
Quantity Discount--Class B
Shares Purchased Prior to
August 1, 1994............. B-40 -- -- 26 26 -- 26
Shareholder Investment
Account...................... B-40 22 30 26 29 29 22 28
Automatic Reinvestment of
Dividends and/or
Distributions.............. B-40 22 30 26 29 29 22 28
Exchange Privilege.......... B-41 21 29 26 27 27 21 27
Dollar Cost Averaging....... B-42 -- -- -- -- -- --
Automatic Savings
Accumulation Plan (ASAP)... B-43 22 30 26 29 29 22 29
Systematic Withdrawal
Plan....................... B-43 22 30 26 29 29 22 29
How to Redeem Shares of the
Money Market Series........ B-43 20 -- -- -- -- 19 --
Mutual Fund Programs........ B-44
Net Asset Value............... B-45 13 17 14 16 16 13 16
Performance Information....... B-46 6 17 15 17 17 6 17
Distributions and Tax
Information.................. B-49 13 18 15 17 17 13 17
Distributions............... B-49 15 19 17 19 19 14 19
Federal Taxation............ B-50 13 18 15 17 17 13 17
State Taxation.............. B-53 14 19 16 19 18 14 19
Organization and
Capitalization............... B-59 15 20 17 20 20 15 19
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants...... B-60 12 16 14 16 16 12 16
Description of Tax-Exempt
Security Ratings............. B-61 -- -- A-1 -- -- -- --
Financial Statements.......... B-63 5 5 -- 5 5 5 5
Appendix I.................... I-1 -- -- -- -- -- -- --
Appendix II................... II-1 -- -- -- -- -- -- --
</TABLE>
<PAGE>
TABLE OF CONTENTS (continued)
<TABLE>
<CAPTION>
Cross-References to Pages in Series Prospectuses
-----------------------------------------------------------------------
New Jersey New York
New Money New York Money North
Page Jersey Market New York Income Market Carolina Ohio Pennsylvania
---- ------ ---------- -------- -------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General Information..................... B-1 20 15 20 16 14 20 20 19
Investment Objectives and Policies...... B-1 8 6 8 5 6 8 8 8
In General............................ B-1 -- -- -- -- -- -- -- --
Tax-Exempt Securities................. B-3 8 6 8 5 6 8 8 8
Risks of Investing in Defaulted
Securities........................... B-4 -- -- -- -- -- -- -- --
Special Considerations Regarding
Investments in Tax-Exempt
Securities........................... B-5 12 9 12 9 8 12 12 12
Floating Rate and Variable Rate
Securities........................... B-15 8 7 8 5 7 8 8 8
Put Options........................... B-15 10 8 9 6 8 10 10 10
Financial Futures Contracts and
Options Thereon...................... B-16 11 -- 10 8 -- 11 11 10
When-Issued and Delayed Delivery
Securities........................... B-18 10 8 10 7 8 10 10 10
Portfolio Turnover.................... B-19 13 -- 12 10 -- 12 13 12
Illiquid Securities................... B-19 13 10 12 10 9 13 13 13
Repurchase Agreements................. B-20 12 9 12 9 9 12 12 12
Investment Restrictions................. B-20 13 10 13 10 9 13 13 13
Trustees and Officers................... B-22 13 10 13 10 9 13 13 13
Manager................................. B-27 13 10 13 10 10 13 13 13
Distributor............................. B-31 14 11 14 11 10 14 14 14
Portfolio Transactions and Brokerage.... B-35 16 12 16 12 11 16 16 16
Purchase and Redemption of Fund
Shares................................. B-37 21 16 21 17 15 21 21 21
Specimen Price Make-Up................ B-38 -- -- -- -- -- -- -- --
Reduction and Waiver of Initial Sales
Charges--Class A Shares.............. B-38 23 -- 23 18 -- 23 24 23
Waiver of the Contingent Deferred
Sales Charge--Class B Shares......... B-40 26 -- 26 -- -- 26 27 26
Quantity Discount--Class B Shares
Purchased Prior to August 1, 1994.... B-40 27 -- 26 -- -- 26 27 26
Shareholder Investment Account.......... B-40 29 22 29 21 21 28 29 28
Automatic Reinvestment of Dividends
and/or Distributions................. B-40 29 22 29 21 21 28 29 28
Exchange Privilege.................... B-41 28 22 28 20 20 27 28 27
Dollar Cost Averaging................. B-42 -- -- -- -- -- -- -- --
Automatic Savings Accumulation Plan
(ASAP)............................... B-43 29 22 29 21 21 29 29 28
Systematic Withdrawal Plan............ B-43 29 23 29 21 21 29 29 28
How to Redeem Shares of the Money
Market Series........................ B-43 -- 20 -- -- 18 -- -- --
Mutual Fund Programs.................. B-44
Net Asset Value......................... B-45 17 13 16 13 12 16 16 16
Performance Information................. B-46 17 6 17 13 6 17 17 17
Distributions and Tax Information....... B-49 18 13 17 14 12 17 18 17
Distributions......................... B-49 19 15 19 15 13 19 19 19
Federal Taxation...................... B-50 18 14 17 14 12 17 18 17
State Taxation........................ B-53 19 14 18 15 13 19 19 18
Organization and Capitalization......... B-59 20 15 20 16 14 20 20 19
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants............................ B-60 16 13 16 13 12 16 16 16
Description of Tax-Exempt Security
Ratings................................ B-61 -- -- -- -- -- -- --
Financial Statements.................... B-63 5 5 5 -- 5 5 5 5
Appendix I.............................. I-1 -- -- -- -- -- -- -- --
Appendix II............................. II-1 -- -- -- -- -- -- -- --
</TABLE>
<PAGE>
GENERAL INFORMATION
The Fund was organized on May 18, 1984. On February 28, 1991, the Trustees
approved an amendment to the Declaration of Trust to change the Fund's name from
Prudential-Bache Municipal Series Fund to Prudential Municipal Series Fund.
INVESTMENT OBJECTIVES AND POLICIES
In General
Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company consisting of fourteen separate series: the Connecticut Money
Market Series, the Florida Series, the Hawaii Income Series, the Maryland
Series, the Massachusetts Series, the Massachusetts Money Market Series, the
Michigan Series, the New Jersey Series, the New Jersey Money Market Series, the
New York Series, the New York Money Market Series, the North Carolina Series,
the Ohio Series and the Pennsylvania Series. A fifteenth series, the New York
Income Series, is not currently being offered. A separate Prospectus has been
prepared for each series. This Statement of Additional Information is applicable
to all series. The investment objective of each series, other than the money
market series, is to seek to provide to shareholders who are residents of the
respective state the maximum amount of income that is exempt from federal and
applicable state income taxes and, in the case of the New York Series and the
New York Income Series, also New York City income taxes, consistent with the
preservation of capital, and, in conjunction therewith, the series may invest in
debt securities with the potential for capital gain. Opportunities for capital
gain may exist, for example, when securities are believed to be undervalued or
when the likelihood of redemption by the issuer at a price above the purchase
price indicates capital gain potential. The investment objective of each money
market series is to provide the highest level of current income that is exempt
from federal and applicable state income taxes and, in the case of the New York
Money Market Series, also New York City income taxes, consistent with liquidity
and the preservation of capital. All of the series are diversified except the
Florida Series, the Hawaii Income Series, the New York Income Series and the
money market series, other than the New York Money Market Series. There can be
no assurance that any series will achieve its objective or that all income from
any series will be exempt from all federal, state or local income taxes.
The investment objective of a series may not be changed without the approval
of the holders of a majority of the outstanding voting securities of such
series. A "majority of the outstanding voting securities" of a series when used
in this Statement of Additional Information means the lesser of (i) 67% of the
voting shares of a series represented at a meeting at which more than 50% of the
outstanding voting shares of a series are present in person or represented by
proxy or (ii) more than 50% of the outstanding voting shares of a series.
Each series of the Fund, other than the money market series, will invest in
"investment grade" tax-exempt securities which on the date of investment are
rated within the four highest ratings of Moody's Investors Service (Moody's),
currently Aaa, Aa, A, Baa for bonds, MIG 1, MIG 2, MIG 3, MIG 4 for notes, and
P-1 for commercial paper, or of Standard & Poor's Ratings Group (S&P), currently
AAA, AA, A, BBB for bonds, SP-1, SP-2 for notes and A-1 for commercial paper.
The New York Income Series may invest up to 30% of its total assets in New York
Obligations rated below Baa by Moody's or below BBB by S&P or if non-rated, of
comparable quality, in the opinion of the Fund's investment adviser, based on
its credit analysis. In addition, the New York Income Series may invest up to 5%
of its total assets in New York Obligations which are in default in the payment
of principal or interest. The money market series will invest in securities
which, at the time of purchase, have a remaining maturity of thirteen months or
less and are rated (or issued by an issuer that is rated with respect to a class
of short-term debt obligations, or any security within that class, that is
comparable in priority and security with the security) in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations assigning a rating to the security or issuer (or, if only one such
rating organization assigned a rating, by that rating organization). Each series
may invest in tax-exempt securities which are not rated if, based upon a credit
analysis by the investment adviser under the supervision of the Trustees, the
investment adviser believes that such securities are of comparable quality to
other municipal securities that the series may purchase. A description of the
ratings is set forth under the heading "Description of Tax-Exempt Security
Ratings" in this Statement of Additional Information. The ratings of Moody's and
S&P represent the respective opinions of such firms of the qualities of the
securities each undertakes to rate and
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such ratings are general and are not absolute standards of quality. In
determining suitability of investment in a particular unrated security, the
investment adviser will take into consideration asset and debt service coverage,
the purpose of the financing, history of the issuer, existence of other rated
securities of the issuer, credit enhancement by virtue of letter of credit or
other financial guaranty deemed suitable by the investment adviser and other
general conditions as may be relevant, including comparability to other issuers.
Under normal market conditions, each series will attempt to invest
substantially all and, as a matter of fundamental policy, will invest at least
80% of the value of its assets in securities the interest on which is exempt
from state and federal income taxes or the series' assets will be invested so
that at least 80% of the income will be exempt from state and federal income
taxes, except that, as a matter of fundamental policy, during normal market
conditions the Florida Series', the New Jersey Series' and the New Jersey Money
Market Series' assets will be invested so that at least 80% of their total
assets will be invested in Florida Obligations (as defined in the Florida
Series' Prospectus) and New Jersey Obligations (as defined in the New Jersey
Series' and the New Jersey Money Market Series' Prospectuses), respectively, and
except that, as a matter of fundamental policy, during normal market conditions
the Connecticut Money Market Series' and the Massachusetts Money Market Series'
assets will be invested so that at least 80% of their total assets will be
invested in municipal securities which pay income exempt from federal income
taxes. These latter securities primarily will be Connecticut Obligations (as
defined in the Connecticut Money Market Series' Prospectus) and Massachusetts
Obligations (as defined in the Massachusetts Money Market Series' Prospectus),
respectively, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Connecticut Obligations and Massachusetts
Obligations, respectively, that also meet the Series' credit quality and average
weighted maturity requirements, to purchase Connecticut Obligations and
Massachusetts Obligations, respectively. Each series will continuously monitor
the 80% tests to ensure that either the asset investment or the income test is
met at all times, except for temporary defensive measures during abnormal market
conditions.
A series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax, pending the investment or reinvestment in tax-exempt securities of
proceeds of sales of shares or sales of portfolio securities or in order to
avoid the necessity of liquidating portfolio investments to meet redemptions of
shares by investors or where market conditions due to rising interest rates or
other adverse factors warrant temporary investing. Investments (other than those
of the money market series) in taxable securities may include: obligations of
the U.S. Government, its agencies or instrumentalities; other debt securities
rated within the four highest grades by either Moody's or S&P or, if unrated,
judged by the investment adviser to possess comparable creditworthiness;
commercial paper rated in the highest grade by either of such rating services
(P-1 or A-1, respectively); certificates of deposit and bankers' acceptances;
and repurchase agreements with respect to any of the foregoing investments. The
money market series may also invest in the taxable securities listed above,
except that their debt securities, if rated, will be rated within the two
highest rating categories by at least two nationally recognized statistical
rating organizations assigning a rating to the security or issuer (or if only
one such rating organization assigned a rating, by that rating organization). No
series intends to invest more than 5% of its assets in any one of the foregoing
taxable securities. A series may also hold its assets in other cash equivalents
or in cash.
Each series except for the Florida Series, the Hawaii Income Series, the New
York Income Series and the money market series, other than the New York Money
Market Series, is classified as a "diversified" investment company under the
Investment Company Act of 1940 (the Investment Company Act). This means that
with respect to 75% of these series' assets, (1) no series may invest more than
5% of its total assets in the securities of any one issuer (except U.S.
Government obligations) and (2) no series may own more than 10% of the
outstanding voting securities of any one issuer. For purposes of calculating
these 5% or 10% ownership limitations, the series will consider the ultimate
source of revenues supporting each obligation to be a separate issuer. For
example, even though a state hospital authority or a state economic development
authority might issue obligations on behalf of many different entities, each of
the underlying health facilities or economic development projects will be
considered as a separate issuer. These investments are also subject to the
limitations described in the remainder of this section. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" in the
Prospectuses of the Florida Series, the Hawaii Income Series, the New York
Income Series and the money market series, other than the New York Money Market
Series.
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Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a series may own so long as, with respect to 75% of the assets
of each series other than the Florida Series, the Hawaii Income Series, the New
York Income Series and the money market series (except for the New York Money
Market Series), it does not invest more than 5% of its total assets in the
securities of such issuer (except obligations issued or guaranteed by the U.S.
Government). As for the other 25% of a series' assets not subject to the
limitation described above, there is no limitation on the amount of these assets
that may be invested in a minimum number of issuers. Because of the relatively
smaller number of issuers of investment-grade tax-exempt securities (or, in the
case of the New York Money Market Series, high quality tax-exempt securities) in
any one of these states, a series is more likely to use this ability to invest
its assets in the securities of a single issuer than is an investment company
which invests in a broad range of tax-exempt securities. Such concentration
involves an increased risk of loss to a series should the issuer be unable to
make interest or principal payments thereon or should the market value of such
securities decline.
The Fund expects that a series will not invest more than 25% of its total
assets in municipal obligations the source of revenue of which is derived from
any one of the following categories: hospitals and health facilities; turnpikes
and toll roads; ports and airports; or colleges and universities. A series may
invest more than 25% of its total assets in municipal obligations of one or more
of the following types: obligations of public housing authorities; general
obligations of states and localities; lease rental obligations of states and
local authorities; obligations of state and local housing finance authorities;
obligations of municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. Each of the foregoing types of
investments might be subject to particular risks which, to the extent that a
series is concentrated in such investments, could affect the value or liquidity
of the series.
Each series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and any premiums on the refunded bonds and a verification
report prepared by a party acceptable to a nationally recognized statistical
rating agency, or counsel to the holders of the refunded bonds, so verifies,
(iv) the escrow agreement provides that the issuer of the refunded bonds grants
and assigns to the escrow agent, for the equal and ratable benefit of the
holders of the refunded bonds, an express first lien on, pledge of and perfected
security interest in the escrowed securities and the interest income thereon,
(v) the escrow agent had no lien of any type with respect to the escrowed
securities for payment of its fees or expenses except to the extent there are
excess securities, as described in (ii) above, and (vi) except with respect to
the Florida Series, the Hawaii Income Series, the New York Income Series and the
money market series other than the New York Money Market Series, the series will
not invest more than 25% of its total assets in pre-refunded bonds of the same
municipal issuer.
Tax-Exempt Securities
Tax-exempt securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is exempt from federal income tax (except for possible
application of the alternative minimum tax) and, in certain instances,
applicable state or local income and personal property taxes. Such securities
are traded primarily in the over-the-counter market.
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the
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nongovernmental user, the nongovernmental user is regarded as the sole issuer.
If in either case the creating government or another entity guarantees an
obligation, the guaranty may be regarded as a separate security and treated as
an issue of such guarantor.
Tax-Exempt Bonds. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, and gas and electric utilities.
Tax-exempt bonds also may be issued in connection with the refunding of
outstanding obligations, to obtain funds to lend to other public institutions,
or for general operating expenses.
The two principal classifications of tax-exempt bonds are "general
obligation" and "revenue". General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. The Internal Revenue Code restricts
the types of industrial development bonds (IDBs) which qualify to pay interest
exempt from federal income tax, and interest on certain IDBs issued after August
7, 1986 is subject to the alternative minimum tax. Although IDBs are issued by
municipal authorities, they are generally secured by the revenues derived from
payments of the industrial user. The payment of the principal and interest on
IDBs is dependent solely on the ability of the user of the facilities financed
by the bonds to meet its financial obligations and the pledge, if any, of real
and personal property so financed as security for such payment.
Tax-Exempt Notes. Tax-exempt notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Tax-exempt notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to
provide interim financing until long-term financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of the
Notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by
a commitment by the Government National Mortgage Association (GNMA) to
purchase the loan, accompanied by a commitment by the Federal Housing
Administration to insure mortgage advances thereunder. In other instances,
permanent financing is provided by commitments of banks to purchase the
loan.
Tax-Exempt Commercial Paper. Issues of tax-exempt commercial paper
typically represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.
Risks of Investing in Defaulted Securities
The New York Income Series may invest up to 5% of its total assets in New
York Obligations that are in default in the payment of principal or interest.
There are a number of risks associated with investments in defaulted securities.
These risks include investment in an already troubled issuer, the possible
incurrence of costs associated with indemnifying the trustee for pursuing
remedies (which amount could equal the principal amount of the securities
purchased) and possible legal and consulting fees incurred to pursue remedies.
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Special Considerations Regarding Investments in Tax-Exempt Securities
The following is a discussion of the general factors that might influence
the ability of the issuers in the various states to repay principal and interest
when due on the obligations contained in the portfolio of each series. Such
information is derived from sources that are generally available to investors
and is believed to be accurate, but has not been independently verified and may
not be complete.
CONNECTICUT
Connecticut, which experienced very strong economic growth throughout the
mid-to-late 1980s, is a wealthy state. During Connecticut's period of strong
growth, the State's personal income growth exceeded that of the United States,
its per capita income was the highest in the nation, and the rate of
unemployment was below the national average. Beginning in 1988, however, these
trends began to reverse as the Northeast entered into recession in advance of
the rest of the nation. The recession in the Northeast was precipitated largely
by major reductions in defense spending and by weaknesses in housing and office
construction, banking, and the insurance industry. As a result, personal income
growth has slowed considerably and unemployment has risen significantly,
although remaining somewhat below the national average.
Connecticut's economic difficulties resulted in severe fiscal stress,
culminating in a General Fund deficit of $965 million at the close of fiscal
year 1991, and the subsequent issuance of a like amount of Economic Recovery
Notes, which are being repaid over a five-year period. In fiscal year 1992, the
State acted to reduce the volatility of its budgetary operations by raising
revenues, reducing expenditures and establishing a broader revenue base. Chief
among these actions were (i) the implementation of a 4.5% personal income tax
and (ii) the broadening of the sales tax base, which was coupled with a decrease
in the sales tax rate from 8% to 6%. These actions, along with conservative
revenue projections, permitted the State to achieve modest surpluses for fiscal
years 1992, 1993 and 1994. A portion of such surplus will be used to retire some
of the outstanding Economic Recovery Notes issued to fund the cumulative deficit
of fiscal year 1990-1991.
In June 1992, the Manufacturing Recovery Act of 1992, which is directed
primarily toward providing incentives to manufacturers, was enacted in
Connecticut. The legislation provides credits for establishing new manufacturing
and increasing new employee training. In addition, property tax exemption and
sales tax exemptions were expanded for purchases of certain manufacturing
machinery and production materials.
The adopted budget for fiscal 1995-96 anticipates General Fund revenues of
$8,837.0 million and General Fund expenditures of $8,836.8 million, resulting in
a projected surplus of $0.2 million. The State Comptroller's monthly report as
of October 1995, however, estimates a General Fund shortfall of approximately
$34.4 million. For fiscal 1996-97, the adopted budget anticipates General Fund
revenues of $9,158.0 million and General Fund expenditures of $9,157.8 million,
resulting in a projected surplus of $0.2 million.
The adopted budget reflects implementation of significant tax changes aimed
at increasing overall disposable income and encouraging economic expansion in
the State. A phase down in the personal income tax rate was enacted, pursuant to
which the tax rate on the first $4,500 of taxable income for joint filers is
dropped 33% from 4.5% to 3% for the income year commencing January 1, 1996. For
income years commencing on or after January 1, 1997, the application of the 3%
rate is further expanded to the first $9,000 of taxable income for joint filers.
In addition, a new personal income tax credit, limited to no more than $100 per
filer, has been added for the income years commencing on or after January 1,
1995. To improve the business climate in the State and stimulate long-term job
growth, legislation was also enacted to reduce Connecticut's corporate tax rate
from the current rate of 11.25% to 7.5% by January 1, 2000.
The adopted budget also reflects significant reductions in expenditures from
current service levels. Some of these changes, which are expected to result in
significant long-term savings to the State, including restructuring the General
Assistance program to limit benefits, reform of the Aid to Families with
Dependent Children program to place time limits on benefits, reduction of
long-term care costs by creating a system of capitated rates, merging of mental
health and substance abuse services, consolidating the State's mental health
hospitals and moving the State toward a 40 hour work week for State employees.
FLORIDA
In 1980, Florida ranked seventh in population among the fifty states, having
a population of 9.7 million people. The State has grown dramatically since 1980
and, as of April 1, 1994, Florida ranked fourth in the
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nation, with an estimated population of 13.9 million. The service sector is
Florida's largest employment sector, currently accounting for 86.4% of total
non-farm employment. Florida's manufacturing jobs exist in the high-tech and
value-added sectors, such as electrical and electronic equipment, as well as
printing and publishing. Since 1980, the job creation rate for the State is
greater than two times the nation's rate; however, since 1989, Florida's
unemployment rate has risen faster than the national average. The average rate
of unemployment for Florida since 1985 is 6.3%, while the national average is
6.4%.
South Florida, because of its location and involvement with foreign trade,
tourism and investment capital, is particularly susceptible to international
trade and currency imbalances and economic dislocations in Central and South
America. The Central and northern portions of the State are effected by problems
in the agricultural sector, particularly in the citrus and sugar industries.
Short-term adverse economic conditions may be experienced by the Central and
northern section of Florida, and in the State as a whole, due to crop failures,
severe weather conditions or other agriculture-related problems. In addition,
the State economy has historically been somewhat dependent on the tourism and
construction industries and is therefore sensitive to trends in those sectors.
Under the State Constitution and applicable statutes, the State budget as a
whole, and each separate fund within the State budget, must be kept in balance
from currently available revenues during each State fiscal year. Estimated
General Revenue plus Working Capital and Budget Stabilization funds available
total $14,682.9 million for 1994-1995, an increase of 6.1% over revenues for
1993-1994. This amount reflects a transfer of $159 million in non-recurring
revenue due to Hurricane Andrew, to a hurricane relief trust fund. Estimated
Revenue of $13,702.1 million (excluding the Hurricane Andrew impacts) for fiscal
1994-1995 represents an increase of 6.6% over 1993-1994.
At the November 1994 general election, voters approved an amendment to the
State Constitution that limits the amount of taxes, fees, licenses and charges
imposed by the Legislature and collected during any fiscal year to the amount of
revenues allowed for the prior fiscal year, plus an adjustment for growth.
Growth is defined as the amount equal to the average annual rate of growth in
Florida personal income over the most recent twenty quarters times the State
revenues allowed for the prior fiscal year. The revenues allowed for any fiscal
year can be increased by a two-thirds vote of the Legislature. The limit will be
effective starting with fiscal year 1995-1996. Any excess revenues generated
will be deposited in the Budget Stabilization fund until it is fully funded and
then refunded to taxpayers. Included among the categories of revenues which are
exempt from the proposed revenue limitation are revenues pledged to State bonds.
Many factors, including national, economic, social and environmental
policies and conditions, most which are not within the control of the State or
local government, could affect or adversely impact on the State's financial
condition.
HAWAII
Hawaii's separation from the mainland and dependence upon tourism make it
unique among the states. Tourism dominates Hawaii's economy, with six out of ten
jobs in the economy related to tourism. Other major sectors of the Hawaiian
economy include construction, retail trade, agriculture, and military
operations, all of which have been adversely affected by recent recessions in
the United States (particularly California) and Japan, and cutbacks in military
spending. Hawaii's economy experienced strong growth during that late 1980s, but
since 1990 the rate of growth has slowed considerably, marked by a decrease in
Japanese investment and construction and increased foreign competition in the
production of pineapples and sugar.
Over the years, financial operations in the State have been sound, with
consistently favorable budget performance. Surpluses in excess of 5% of revenues
have regularly triggered constitutionally provided tax credits, even during
fiscal years 1992 and 1993 when revenue growth had slowed due to the recession.
The 1995-97 biennium budget submitted by the prior administration in December
1994, has undergone substantial adjustments and the new administration has made
extensive labor reductions. Despite these reductions, however, the available
General Fund balance is expected to decline from $290.9 million at the end of
fiscal 1994 to $53.9 million at the end of fiscal 1996.
Hawaii's economy remains vulnerable to the lingering recessions of both
California and Japan and the State government cutbacks may also adversely affect
economic growth. Reported improvement in the tourism
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industry has not yet been reflected in State revenues, and has lagged early
estimates. Employment has continued to decline, with job growth the slowest of
all fifty states in 1994. These factors, combined with the decline in
construction, suggest that continued stagnation in the near future is probable
for Hawaii's economy.
MARYLAND
Maryland, one of the wealthiest states in the nation, experienced rapid
growth during the 1980s. Maryland's total personal income and per capita income
outperformed the national averages until 1990. The economy is well diversified,
with services, trade, and government, accounting for a large percentage of total
employment. Due to Maryland's proximity to Washington, D.C., government
employment plays an important role in the economy. Government employment has
served to insulate the regional economy from more volatile economic swings,
making the Maryland unemployment rate historically below the national average.
For the same reason, Maryland employment may be more affected by federal layoffs
or budget reductions than employment in other states.
Maryland has generally been among the most heavily indebted of the states,
although its position was more moderate with the inclusion of local debt,
reflecting in part the State's assumption of school construction costs several
years ago. The State, concerned over its debt levels, followed the
recommendation of a debt affordability committee and restrained its borrowing.
Resources have also expanded and ratios have stabilized. Capital borrowing plans
are reasonable and designed not to increase debt levels substantially.
During the three fiscal years from 1991 through 1993, the State's finances
were severely affected by the national recession. Nevertheless, the State closed
fiscal year 1993 with a $10.5 million operating surplus on a budgetary basis and
closed fiscal year 1994 with a $60 million operating surplus on a budgetary
basis. On a GAAP basis, the State's General Fund moved from a deficit of $121.7
million as of June 30, 1993 to a positive balance of $113.9 million on June 30,
1994. Financial operations continued to improve in fiscal year 1995, with
revenues exceeding estimate by $217 million and expenditures at $184 million
above budget. At fiscal year-end, the General Fund recorded an undesignated fund
balance of $26.5 million (after reservation of $106 million for fiscal year 1996
expenses). An additional $286.1 million was on deposit in the Revenue
Stabilization Account of the State Reserve Fund. The 1996 budget continues the
trend of increased budgetary reserves. The operating budget assumes moderate
revenue growth and expenditures of $14.428 billion, a 6.6% increase over the
actual expenditures in fiscal year 1995. The State projects a year-end General
Fund balance of $34.3 million and an additional $518 million in the Revenue
Stabilization Account of the State Reserve Fund.
The State and its various political subdivisions issue a number of different
kinds of municipal obligations, including general obligation bonds supported by
tax collections, revenue bonds payable from certain identified tax levies or
revenue streams, conduit revenue bonds payable from the repayment of certain
loans to authorized entities such as hospitals, universities and other private
entities, and certificates of participation in tax-exempt municipal leases.
These obligations are subject to various economic risks and uncertainties, and
the credit quality of the securities issued by them varies with the financial
strengths of the respective borrowers.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on the financial condition of Maryland
issuers generally, will not adversely affect the market value of Maryland
Obligations held by the Maryland Series or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.
MASSACHUSETTS
Massachusetts is an urban, densely populated, and wealthy state with a fully
developed industrial economy. Massachusetts' industrial economy has experienced
a significant evolution in the last decade, shifting from textiles, leather
products and heavy manufacturing into high technology and defense-related
sectors, with concomitant growth in services and trade. Little affected by the
national recession of the early 1980s, Massachusetts enjoyed unemployment rates
among the lowest in the nation for the most of the decade. But, as the economy
slowed, unemployment rates rose in 1988, 1989 and 1990. Unemployment climbed
above the national figure to 9.0% in 1991, placing Massachusetts among those
states with the highest unemployment rates in the nation. The construction and
manufacturing sectors were particularly hard hit by job losses. Personal income
growth, both for the total and on a per capita basis, also slowed to below the
national rate in 1989, although per capita personal income levels are still far
above the U.S. figure. It appears that two of the
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factors contributing to the earlier economic boom -- large increases in defense
contract spending and low oil prices -- are no longer present, and the inflation
in the relative costs of land and labor also poses an economic disadvantage.
The recent economic downturn has had serious adverse effects on
Massachusetts' financial operations, which experienced increasing budgetary
deficits through fiscal year 1990. At the close of fiscal year 1990, the
Commonwealth faced a massive accumulated deficit of $1.45 billion. In order to
regain fiscal solvency, the Commonwealth sold a total of $1.4 billion in
dedicated tax bonds secured by a portion of the Commonwealth's income tax
proceeds as well as the full faith and credit general obligation pledge of the
Commonwealth. Since that time, the Commonwealth has adopted more conservative
revenue forecasting procedures and has moderated spending growth. Such restraint
has resulted in the achievement of balanced budgets in both fiscal year
1991-1992 and fiscal year 1992-1993. Fiscal year 1995 tax collections, which
were projected at $11.151 billion, exceeded estimates by $13 million.
Despite concerted efforts to control Massachusetts' financial operations,
and some progress in that regard, substantial risks to the Commonwealth's
financial stability remain. Economic growth is not likely to return, in the near
future, to the vigorous pace evident in the 1980s. It is uncertain whether
improved communication and efforts towards cooperation between the Commonwealth
legislature and executive will continue. Local economic conditions remain weak,
and the Commonwealth is likely to continue to face considerable difficulty in
balancing its annual operating budgets. Education reform legislation enacted in
June 1993 was estimated to require annual spending increases for elementary and
secondary education of $175 million in fiscal 1994, $414 million in 1995, and
$662 million in 1996. This program will absorb a large part of the
Commonwealth's future revenue growth.
Proposition 2 1/2 is a property tax limitation initiative passed by
Massachusetts voters in 1980. In general, Proposition 2 1/2 constrains the
ability of cities and towns to raise property tax revenues. As property taxes
are the only local source revenue available, such tax limitation may lead to
adverse financial consequences for some municipalities. Under Proposition 2 1/2,
many cities and towns were required to reduce their property tax levies to a
stated percentage of the full and fair cash value of their taxable real estate
and personal property. The Proposition limited the amount by which the total
property taxes assessed by all cities and towns may increase from year to year.
MICHIGAN
Michigan is a highly industrialized state with an economy principally
dependent upon three sectors: manufacturing (particularly durable goods,
automotive products and office equipment), tourism and agriculture. Legislation
requires that the administration prepare two economic forecasts each year, which
are presented each January and May of a given year. The State's economic
forecast for calendar 1995 projects modest growth. Real gross domestic product
is projected to grow 2.9% in 1995 on a calendar year basis. Car and light truck
sales are expected to total 14.9 million units in 1995. The forecast assumes
moderate inflation, accompanied by steady interest rates. Ninety-day U.S.
Treasury rates are expected to average 5.7% for 1995.
The State's forecast for the Michigan economy reflects the national outlook.
Total wage and salary employment is projected to grow 2.9% in 1995. This slight
growth reflects the ongoing diversification of the Michigan economy. The
unemployment rate is projected to average 5.9% in 1995, continuing the recent
trend of Michigan's unemployment rate being near the national average, compared
to a 15-year prior history of having higher than average unemployment.
The principal revenue sources for the State's General Fund are taxes from
sales, personal income, single business, and excise taxes. Under the State
Constitution, expenditures from the General Fund are not permitted to exceed
available revenues. The principal expenditures from the General Fund are
directed towards education, public protection, mental and public health, and
social services. The State's fiscal year ended September 30, 1993, marked a
turning point in the financial condition of the State budget. Improvements in
the Michigan economy have resulted in increased revenue collections, which,
together with restraint on the expenditure side of the budget, produced General
Fund surpluses of $280.1 million in fiscal year 1992-93 and $602.9 million in
fiscal year 1993-94, and a projected surplus of $85.1 million for fiscal year
1994-95. The
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State's general fund budget for fiscal year 1995-96 was passed by the
Legislature in June 1995, and totalled $8,438.6 million of revenues and
expenditures. The Governor has since vetoed approximately $40 million of
appropriations passed by the Legislature and has other appropriation bills
before him awaiting signature.
The State Constitution limits the amount of total State revenues that can be
raised from taxes and certain other sources. State revenues (excluding federal
aid and revenues for payment of principal and interest on general obligation
bonds) in any fiscal year are limited to a fixed percentage of State personal
income in the prior calendar year or average of the prior three calendar years,
whichever is greater, and this fixed percentage equals the ratio of the 1978-79
fiscal year revenues to total calendar 1977 State personal income.
In August 1993, the Governor signed into law a measure that has
significantly impacted the financing of primary and secondary school operations
in the State and has resulted in additional property tax and school finance
reform legislation. This legislation exempts all property in the State from
millage levied for local and intermediate school district operating purposes,
other than millages levied for community colleges. In order to replace local
property tax revenues lost as a result of this legislation, the Legislature
enacted several laws in December 1993 which address property tax and school
finance reform, including a ballot proposal that was approved by Michigan voters
in March 1994. Under this proposal, effective May 1, 1994, the State sales and
use tax was increased from 4% to 6%, the State income tax was decreased from
4.6% to 4.4%, the cigarette tax was increased from $0.25 to $0.75 per pack and
an additional tax of 16% of the wholesale price began to be imposed on certain
other tobacco products. A 0.75% real estate transfer tax became effective
January 1, 1995, and a State property tax of 6 mills began to be imposed in 1994
on all real and personal property currently subject to the general property tax.
The total effect of these school finance reforms is to shift significant
portions of the cost of local school operations from local school districts to
the State and raise additional State revenues to fund these additional State
expenses. These additional revenues will be included within the State's
constitutional revenue limitations and may impact the State's ability to raise
additional revenues in the future.
Although revenue obligations of the State or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that further economic difficulties will not adversely affect the
market value of municipal obligations held in the portfolio of the Michigan
Series or the ability of the respective obligors to make required payments on
such obligations.
NEW JERSEY
New Jersey has a highly diversified economy. While once heavily dependent
upon manufacturing, New Jersey's economy is now increasingly based on trade and
services. The State fully participated in the national economic recovery and did
not experience the brunt of the Northeast recession until much later than many
other states. The rate of unemployment was consistently below the national
average through 1991. In 1992, however, the unemployment rate rose well above
that of the nation. While personal income growth lagged behind the U.S. level in
1989 and 1991, since 1989, the State's per capita income remains the second
highest in the United States.
The principal sources of State revenue are sales, corporate and personal
income taxes. The Constitution of the State prohibits the expenditure of funds
in excess of the State's revenues and reserves. Since the Constitution was
adopted in 1947, New Jersey has always had a positive undesignated fund balance
in its general fund at the end of each year. A favorable economy translated into
substantial growth in revenue and surpluses: from fiscal year 1984 to 1988
revenues grew almost 40%. Economic slowdown translated revenue shortfalls and
operating deficits in fiscal years 1989 and 1990. Surplus balances, which peaked
at $1.2 billion in fiscal year 1988, fell to $116 million (excluding the
Transition School Aid Account) by fiscal year-end 1991.
At first, the State was able to use its significant fund balance reserves to
cushion against the large imbalance between revenues and expenditures. In fiscal
year 1991, however, a $1.4 billion tax program was required to balance the
budget.
For the last three fiscal years, the State has resorted to a number of
non-recurring revenues and expenditure deferrals to balance its budget. In
addition, balancing the budget was made difficult by a tax revolt in the 1991
elections that resulted in a reduction of the sales tax by 1%, from 7% to 6%. A
balanced budget was achieved by delaying a $1.1 billion contribution to the
State employees' pension fund. This move, in addition to heavy
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borrowing by the previous administration, has caused concern that the State bond
rating may be adversely affected. Despite certain reservations regarding the New
Jersey economy, however, S&P recently announced that New Jersey will retain its
AA+ bond rating.
The fiscal 1995 ending balances were $966 million, up from $455 originally
budgeted. The fiscal 1996 budget plans a $549 million ending balance, prior to
inclusion of any lapsed appropriations. Furthermore, the fiscal 1996 budget
enacts the third and final phase of the administration's multi-year 30% personal
income tax reduction, which is effective in January 1996.
Spending reductions in current and future years rely on savings from reduced
costs of the State's employee workforce. The State has reached agreements with
two of its unions, but major agreements with some of the largest unions still
have to be reached. Furthermore, a 1994 State Supreme Court decision regarding
the State's system of funding of education required that the State achieve
substantial equivalence in spending between wealthy and poor districts by fiscal
1998.
NEW YORK
New York State is the third most populous state in the nation (behind
California and Texas) and has a relatively high level of personal wealth. The
State's economy is diverse, with a comparatively large share of the nation's
finance, insurance, transportation, communications and services employment, and
a comparatively small share of the nation's farming and mining activity. A
declining proportion of the State's work force in engaged in manufacturing and
an increasing proportion of its work force is engaged in service industries.
This transition reflects a national trend. Historically, the State has been one
of the wealthiest states in the nation. For decades, however, the State has
grown more slowly than the nation as a whole, gradually eroding its relative
economic affluence.
A nation-wide recession commenced in mid-1990. The downturn continued
throughout the State's 1990-1991 fiscal year and was followed by a period of
weak economic growth during the 1991 and 1992 calendar years. In 1993, the
economy grew faster than in 1992, but at a very modest rate as compared to other
recoveries. In contrast with the strength of the national economy in 1994 and
into 1995, New York's economic recovery weakened by mid-1994. The State's
delayed economic recovery is due, in part, to the significant retrenchment in
the banking and financial services industries, downsizing by several major
corporations, cutbacks in defense spending, and an over supply of office
buildings. The State currently forecasts an anticipated employment growth of
0.4% for calendar 1996.
The recommended budget for fiscal 1995-1996 seeks to (i) close the gap based
on growth of current services, (ii) implement the next phase of delayed personal
income tax cuts and (iii) further reduce personal income and business taxes over
a multi-year period.
The State's General Fund budgets for fiscal years 1992-1993 and 1993-1994
produced cash surpluses for the first time since fiscal year 1987-1988. The
1994-1995 General Fund budget finished with an actual deficit of $241 million.
The State's projections for the fiscal year 1995-1996 General Fund budget call
for a surplus of $55 million. There is no assurance that the State will not face
substantial potential budget gaps in future years resulting from a significant
disparity between tax revenues projected from a lower recurring receipts base
and the spending required to maintain State programs at current levels. The
State, in addressing any potential budgetary imbalance, may need to take
significant actions to align recurring receipts and disbursements in future
fiscal years.
NORTH CAROLINA
The following discussion regarding the financial condition of the North
Carolina State government may not be relevant to general obligation or revenue
bonds issued by political subdivisions of the State. Such information, and the
following discussion regarding the economy of the State, are included for the
purpose of providing information about general economic conditions that may or
may not affect issuers of North Carolina obligations.
The economic profile of North Carolina consists of a combination of
industry, agriculture and tourism. The population of the State increased 13%
between 1980 and 1990, from 5,880,095 to 6,657,106 as reported by the 1990
federal census. The State's estimate of population as of June 30, 1994 is
7,064,470. Although North Carolina is the tenth largest state in population, it
is primarily a rural state, having only five municipalities with
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populations in excess of 100,000. The State, once largely an agriculturally
based economy, is now a service and goods producing economy. From 1980 to 1994,
the State labor force increased by approximately 26% (from 2,855,200 to
3,609,000) and during the period 1980-1993, per capita income grew from $7,999
to $18,702, an increase of 133.8%.
The North Carolina State Constitution requires that the State's total
expenditures for the fiscal period covered by each budget not exceed the total
of receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period.
In 1990 and 1991 the State had difficulty meeting its budgetary projections.
The General Assembly responded by enacting new taxes and fees to generate
additional revenue and reduce allowable department operating expenditures and
continuation funding.
The State, like the nation, has experienced economic recovery since 1991.
Due to both increased tax and fee revenues and the previously enacted spending
reductions, the State had a budget surplus of approximately $865 million at the
end of fiscal 1993-1994. After review of the 1994-1995 continuation budget
adopted in 1993, the General Assembly approved spending expansion funds, in part
to restore certain employee salaries to budgeted levels, which amounts had been
deferred to balance the budgets in 1989-1993, and to authorize funding for new
initiatives in economic, social and environmental programs. Because of growth in
State tax and fee revenues, the General Fund balance at the end of the 1994-1995
fiscal year was reported at approximately $300 million.
In April 1995, the North Carolina General Assembly repealed, effective for
taxable years beginning on or after January 1, 1995, the tax levied on various
forms of intangible personal property. The intangibles tax revenues receivable
by counties and municipalities will no longer be received. Instead, the
legislature has provided for specific appropriations to counties and
muncipalities.
The State is involved in certain litigation; however, none of the cases, in
the reported opinion of the Department of the Treasurer, would have a material
adverse effect on the State's ability to meet its obligations.
Both the nation and the State have experienced a modest economic recovery in
the past year. It is unclear, however, what effect these developments, as well
as the reduction in government spending or increase in taxes, may have on the
value of the debt obligations in the North Carolina Series. No clear upward
trend has developed, and both the State and the national economies must be
watched carefully.
OHIO
The Ohio economy, while diversifying more into the services and other
non-manufacturing areas, continues to rely in part on durable goods
manufacturing, although largely concentrated in motor vehicles and equipment,
steel, rubber products and household appliances. As a result, the general
economic activity in Ohio, as in other industrially developed states, is more
cyclical than some other states and the nation overall. Agriculture is an
important segment of the State's economy. More than half of the State's land is
devoted to farming. An estimated 15% of total Ohio employment is in
agribusiness.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund, for which the personal income and
sales-use taxes are the major sources.
The biennium of 1992-93 presented significant challenges to State finances,
which were successfully addressed. To allow time to resolve certain budget
differences, an interim appropriations act was enacted effective July 1, 1991;
it included General Revenue Fund debt service and lease rental appropriations
for the entire biennium, while continuing most other appropriations for a month.
The general appropriations act for the entire biennium was passed on July 11,
1991. Pursuant to it, $200 million was transferred from the Budget Stabilization
Fund to the General Revenue Fund in fiscal year 1992.
Based on updated results and forecasts in the course of fiscal year 1992,
both in light of a continuing uncertain nationwide economic situation, there was
projected, and then timely addressed, a fiscal year 1992 imbalance in General
Revenue Fund resources and expenditures. General Revenue Fund receipts
significantly below original forecasts resulted primarily from lower collections
of certain taxes, particularly sales-use and
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personal income taxes. Higher expenditure levels were in certain areas,
particularly human services including Medicaid. In response, the Governor
ordered most State agencies to reduce General Revenue Fund spending in the last
six months of fiscal year 1992 by a total of approximately $184 million; the
$100.4 million Budget Stabilization Fund balance and additional amounts from
certain other funds were transferred late in the fiscal year to the General
Revenue Fund, and adjustments were made in the timing of certain tax payments.
A significant General Revenue Fund shortfall (approximately $520 million)
was then projected for the next year, fiscal year 1993. It was addressed by
appropriate legislative and administrative actions, including the Governor's
ordering of $300 million in selected General Revenue Fund spending reductions
and subsequent executive and legislative action (a combination of tax revisions
and additional spending reduction). The June 30, 1993 ending General Revenue
Fund balance was approximately $111 million, of which, as a first step to Budget
Stabilization Fund replenishment, $21 million was deposited in the Budget
Stabilization Fund.
The 1994-95 biennium presented a more affirmative financial picture for the
State. Based on June 30, 1994 balances, an additional $260 million was deposited
in the Budget Stabilization Fund. The biennium ended June 30, 1995 with a
General Revenue Fund ending fund balance of $928 million, of which $535.2
million has been transferred into the Budget Stabilization Fund (which had an
October 3, 1995 balance of over $828 million).
The General Revenue Fund appropriations act for the 1995-96 biennium was
passed on June 28, 1995 and promptly signed (after selective vetoes) by the
Governor. All necessary General Revenue Fund appropriations for State debt
service and lease rental payments then projected for the biennium were included
in that act. In accordance with the appropriations act, the significant June 30,
1995 General Revenue Fund balance, after leaving in the General Revenue Fund an
unreserved and undesignated balance of $70 million, has been transferred to a
variety of funds, including $535.2 million to the Budget Stabilization Fund.
$322.8 million was transferred to other funds, including school assistance funds
and, in anticipation of possible federal program changes, a human services
stabilization fund.
The incurrence or assumption of debt by the State without a popular vote is,
with limited exceptions, prohibited by current provisions of the State
Constitution. The State may incur debt to cover casual deficits, failures in
revenues or to meet expenses not otherwise provided for, but limited in amount
to $750,000 plus
debt incurred to repel invasion, suppress insurrection, or defend the State in
war. The State is expressly precluded from assuming any local government debt or
corporation debt, except for debt incurred to repel invasion, suppress
insurrection, or defend the State in war.
Although the State's revenue obligations or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that economic difficulties and the resulting impact on State and
local governmental finances will not adversely affect the market value of
municipal obligations held in the portfolio of the Ohio Series or the ability of
the respective obligors to make required payments on such obligations.
PENNSYLVANIA
Pennsylvania is an established state with a diversified economy.
Pennsylvania has been historically identified as a heavily industrial state,
although that reputation has recently changed due to the decline in the coal,
steel and railroad industries. Education, financial institutions, and the
service sector, which includes trade, medical, and health services, provide the
major sources of revenue growth for Pennsylvania.
The five-year period from fiscal 1990 through fiscal 1994 was marked by
public health and welfare costs growing at a rate double the growth rate for all
of the Commonwealth's expenditures. Rising caseloads, increased services
utilization, and rising prices combined to produce the rapid rise of public
health and welfare costs at a time when the national recession caused tax
revenues to stagnate and decline. During the period from fiscal 1990 through
fiscal 1994, public health and welfare costs rose by an average annual rate of
9.4%. Consequently, spending on other budgeted programs was restrained to a
growth rate below 5%, and sources of revenues other than taxes became larger
components of fund revenues.
The General Fund, the Commonwealth's largest fund, receives all tax
receipts, revenues, federal grants and reimbursements that are not specified by
law to be deposited elsewhere. The General Fund is the principal
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operating fund for the majority of the Commonwealth's governmental activities.
Debt service on all obligations, except those issued for highway purposes or for
the benefit of other special revenue funds, is payable from the General Fund.
The 1994 fiscal year closed with revenues of $15,210.7 million (on a
budgetary basis), $38.6 million above the fiscal year estimate and 3.9% over
Commonwealth revenues during the previous fiscal year. Additional revenues were
provided by higher than anticipated sales tax revenues and a reduction in tax
refund reserve resulting from a favorable decision in a pending tax litigation.
Personal income tax revenues, however, were below estimate. Expenditures (net of
certain pooled financing expenditures and appropriation lapses) totaled
$14,934.4 million, representing a 7.2% increase over fiscal 1993 expenditures.
The 1995 fiscal year closed with revenues of $16,224.6 million and exceeded
the estimate of revenues used at the time the budget was enacted. The higher
than estimated revenues from tax sources were due to faster economic growth in
the national and State economy than had been projected when the budget was
adopted. Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) including $65.5 million of supplemental appropriations enacted at
the close of the 1995 fiscal year, totalled $15,674.7 million, representing an
increase of 5% over spending during fiscal 1994.
The enacted fiscal 1996 budget provides for expenditures from Commonwealth
revenues of $16.161.7 million, a 2.7% increase over total appropriations from
Commonwealth revenues in fiscal 1995. The fiscal 1996 budget is based on
anticipated Commonwealth revenues, net of enacted tax changes but prior to tax
refunds, of $16,268.7 million, an increase over actual fiscal 1995 Commonwealth
revenues of .3%. Excluding the estimated effects of tax changes enacted in 1994
and 1995, Commonwealth revenues for fiscal 1996 are estimated to increase by
approximately 2.9%. Tax changes (reductions) enacted with the fiscal 1996 budget
totalled $282.9 million, representing an approximate 1.7% of base revenues.
The current Constitutional provisions pertaining to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate approved debt, (iii)
debt for capital projects subject to an aggregate debt limit of 1.75 times the
annual average tax revenue of the preceding five fiscal years and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts. As of
June 30, 1995, the Commonwealth had $5,045.4 million of general obligation debt
outstanding.
There is various litigation pending against the Commonwealth, its officers
and employees. An adverse decision in one or more of these cases could
materially affect the Commonwealth's governmental operations.
Additional Issuers
GUAM
Guam is governed under the Organic Act of Guam of 1950, which gave the
island statutory local power of self-government and made the inhabitants of Guam
citizens of the United States.
The economy of Guam is based, in large part, upon the significant U.S.
military presence on the island. The federal government is the largest employer
on the island: in 1991, there were 10,757 active duty military personnel and
approximately 7,762 civilian personnel. Military spending makes a significant
contribution to Guam's economy, exceeding $587 million in 1991. The U.S.
military presence on Guam has increased recently due to the closure of Subic Bay
Naval Base and Clark Air Force Base in the Philippines. The United States Air
Force headquarters has also relocated to Guam from Clark Air Force Base.
Tourism also plays a major role in Guam's economy. Over the past twenty
years, the tourist industry has grown rapidly, creating a construction boom for
new hotels and the expansion of older hotels. With visitors coming mainly from
Japan, tourist arrivals rose by more than 16% annually between 1985 and 1990. In
1992, there were approximately 900,000 tourists. Nevertheless, recent
earthquakes, typhoons and the economic slowdown in Japan have had adverse
effects on Guam's economy. Furthermore, in 1994, Guam was faced with the problem
of offsetting the impact of military downsizing. Guam's economy is also based on
the export of fish and handicrafts. Approximately 60% of the labor force works
for the private sector, and the remaining 40% (approximately) work for the
government. Guam is a duty-free port and an important distribution point for
goods destined for Micronesia. Unemployment, which has been historically low,
was 2% in 1992.
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PUERTO RICO
Puerto Rico enjoys a Commonwealth status with the U.S. as a result of Public
Law 600, enacted by the U.S. Congress in 1950 and affirmed by a referendum in
1952. Residents of Puerto Rico are U.S. citizens.
Since World War II, Puerto Rico has undergone a social and economic
transformation. Puerto Rico, which was at one time a poor, agrarian economy with
a densely populated environment, is now a urbanized society with an economy
based on manufacturing and services. Despite its long-term economic progress,
unemployment and poverty continue to be significant problems. The island's 1994
unemployment rate of 16% was more than double the corresponding U.S. figure, and
income data for the island compare unfavorably with even the poorest of the 50
states.
Financial operations of recent years have reflected general economic trends,
with fiscal improvements registered during good economic times and deterioration
during slowdown. In the mid-1980s, economic recovery and stable oil prices
helped the Commonwealth to reduce the General Fund's accumulated deficit. Later,
as economic slowdown placed financial operations under pressure, the
Commonwealth sought budgetary balance, but with regular reliance on
non-recurring measures. The General Fund closed in a negative cash position in
fiscal years 1992 and 1993. The Commonwealth had projected only a modest
improvement in the General Fund's negative ending position for fiscal year 1994,
even after the announcement in February 1994 of a $211 million increase in the
revenue estimate.
In fiscal year 1995, year-to-date General Fund reserve growth has exceeded
expectations. Original budget projections called for revenue growth of 4.6% over
fiscal year 1994 to $4,878 million. Revenue growth in fiscal year 1995 is
primarily driven by individual income tax receipts, as a result of continued
evasion control measures and increased excise taxes, reflecting continued
economic growth.
In 1993, Congress passed legislation which restricts corporations' ability
to take advantage of Section 936 credits. The extent to which these changes will
slow business investment in Puerto Rico is not clear, although some slowing
effect is to be expected. Also in 1993, the Senate approved NAFTA, which will
pose a new challenge to the Puerto Rican economy by increasing competition from
certain areas with Mexico.
UNITED STATES VIRGIN ISLANDS
The Virgin Islands, comprised of St. Thomas, St. Croix and St. John, form an
unincorporated territory of the United States. The residents of the islands were
granted a measure of self-government by the Organic Act, as revised in 1954.
The Virgin Islands are heavily dependent on links with the U.S. mainland.
More than 90% of the trade is conducted with Puerto Rico and the United States.
Tourism is the predominant source of employment and income for the Islands.
Specifically, the visiting cruise ship business and the advantages of duty-free
purchases are attractive to American visitors. Although tourism in the Virgin
Islands declined in 1992, in 1993 occupancy rates at hotels and on cruise ships
increased, with 18% more American tourists and 30% more European tourists.
The Territorial Government also plays a vital role in the economy of the
Virgin Islands. Since governmental services must be provided on three separate
islands, the duplication of effort results in an unusually large public sector.
In 1993, 26.8% of total employment resulted from Territorial Government
employment. The manufacturing sector consists of textiles, electronics,
pharmaceuticals, and watch assembly plants. International business and financial
services are a small but growing component of the economy. The level of
unemployment has been consistently low, but rose to 3.1% in May 1993.
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Floating Rate and Variable Rate Securities
Each series may invest more than 5% of its assets in floating rate and
variable rate securities, including participation interests therein and (for
series other than money market series) inverse floaters. Floating rate
securities normally have a rate of interest which is set as a specific
percentage of a designated base rate, such as the rate on Treasury Bonds or
Bills or the prime rate at a major commercial bank. The interest rate on
floating rate securities changes whenever there is a change in the designated
base interest rate. Variable rate securities provide for a specific periodic
adjustment in the interest rate based on prevailing market rates and generally
would allow the series to demand payment of the obligation on short notice at
par plus accrued interest, which amount may be more or less than the amount the
series paid for them. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another security or the value of an index. Changes in the interest rate on
the other security or interest inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
Each series may invest in participation interests in variable rate
tax-exempt securities (such as certain IDBs) owned by banks. A participation
interest gives the series an undivided interest in the tax-exempt security in
the proportion that the series' participation interest bears to the total
principal amount of the tax-exempt security and generally provides that the
holder may demand repurchase within one to seven days. Participation interests
frequently are backed by an irrevocable letter of credit or guarantee of a bank
that the investment adviser under the supervision of the Trustees has determined
meets the prescribed quality standards for the series. A series generally has
the right to sell the instrument back to the bank and draw on the letter of
credit on demand, on seven days' notice, for all or any part of the series'
participation interest in the par value of the tax-exempt security, plus accrued
interest. Each series intends to exercise the demand under the letter of credit
only (1) upon a default under the terms of the documents of the tax-exempt
security, (2) as needed to provide liquidity in order to meet redemptions or (3)
to maintain a high quality investment portfolio. Banks will retain a service and
letter of credit fee and a fee for issuing repurchase commitments in an amount
equal to the excess of the interest paid by the issuer on the tax-exempt
securities over the negotiated yield at which the instruments were purchased
from the bank by a series. The investment adviser will monitor the pricing,
quality and liquidity of the variable rate demand instruments held by each
series, including the IDBs supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other bank analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
Put Options
Each series may acquire put options (puts) giving the series the right to
sell securities held in the series' portfolio at a specified exercise price on a
specified date. Such puts may be acquired for the purpose of protecting the
series from a possible decline in the market value of the securities to which
the put applies in the event of interest rate fluctuations and, in the case of
liquidity puts, to shorten the effective maturity of the underlying security.
The aggregate value of the premiums paid to acquire puts held in a series'
portfolio (other than liquidity puts) may not exceed 10% of the net asset value
of such series. The acquisition of a put may involve an additional cost to the
series by payment of a premium for the put, by payment of a higher purchase
price for securities to which the put is attached or through a lower effective
interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades (two
highest grades for the money market series) as determined by Moody's or S&P; or
(2) the put is written by a person other than the issuer of the underlying
security and such person has securities outstanding which are rated within such
four (or two for the money market series) highest quality grade of such rating
services; or (3) the put is backed by a letter of credit or similar financial
guarantee issued by a person having securities outstanding which are rated
within the two highest quality grades of such rating services.
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One form of transaction involving liquidity puts consists of an underlying
fixed rate municipal bond that is subject to a third party demand feature or
"tender option". The holder of the bond would pay a "tender fee" to the third
party tender option provider, the amount of which would be periodically adjusted
so that the bond/ tender option combination would reasonably be expected to have
a market value that approximates the par value of the bond. This bond/tender
option combination would therefore be functionally equivalent to ordinary
variable or floating rate obligations and the Fund may purchase such obligations
subject to certain conditions specified by the Securities and Exchange
Commission (SEC).
Financial Futures Contracts and Options Thereon
FUTURES CONTRACTS. Each series (except for the money market series) may
engage in transactions in financial futures contracts as a hedge against
interest rate related fluctuations in the value of securities which are held in
the investment portfolio or which the series intends to purchase. A clearing
corporation associated with the commodities exchange on which a futures contract
trades assumes responsibility for the completion of transactions and guarantees
that open futures contracts will be closed. Although interest rate futures
contracts call for actual delivery or acceptance of debt securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin". Subsequent payments to and from the broker, called
"variation margin", will be made on a daily basis as the price of the underlying
security or index fluctuates, making the long and short positions in the futures
contracts more or less valuable, a process known as "marking to the market."
When a series purchases a futures contract, it will maintain an amount of
cash, U.S. Government obligations or liquid, high-grade debt securities in a
segregated account with the Fund's Custodian, so that the amount so segregated
plus the amount of initial and variation margin held in the account of its
broker equals the market value of the futures contract, thereby ensuring that
the use of such futures contract is unleveraged. A series that has sold a
futures contract may "cover" that position by owning the instruments underlying
the futures contract or by holding a call option on such futures contract. A
series will not sell futures contracts if the value of such futures contracts
exceeds the total market value of the securities of the series. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
OPTIONS ON FINANCIAL FUTURES. Each series (other than the money market
series) may purchase call options and write put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. Each series will use options on futures in
connection with hedging strategies.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently, options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.
When a series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option. In instances
B-16
<PAGE>
involving the purchase of a call option on a futures contract, the series will
deposit in a segregated account with the Fund's Custodian an amount in cash,
U.S. government obligations or liquid, high-grade debt securities equal to the
market value of the obligation underlying the futures contract, less any amount
held in the initial and variation margin accounts.
LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of "commodity pool operator," subject to
compliance with certain conditions. The exemption is conditioned upon a series'
purchasing and selling financial futures contracts and options thereon for BONA
FIDE hedging transactions, except that a series may purchase and sell futures
contracts and options thereon for any other purpose to the extent that the
aggregate initial margin and option premiums do not exceed 5% of the liquidation
value of the series' total assets. Each series will use financial futures in a
manner consistent with these requirements. With respect to long positions
assumed by a series, the series will segregate with the Fund's Custodian an
amount of cash, U.S. Government securities or liquid, high-grade debt securities
so that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the futures
contracts and thereby insures that the use of futures contracts is unleveraged.
Each series will continue to invest at least 80% of its total assets in
municipal obligations except in certain circumstances, as described in its
Prospectus under "How the Fund Invests--Investment Objective and Policies." A
series may not enter into futures contracts if, immediately thereafter, the sum
of the amount of initial and net cumulative variation margin on outstanding
futures contracts together with premiums paid on options thereon, would exceed
20% of the total assets of the series.
RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests--Investment Objective and Policies-- Futures Contracts and
Options Thereon" in each series' Prospectus, there are a number of other risks
associated with the use of financial futures for hedging purposes.
Each series intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in the futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and, in the event of
adverse price movements, the series would continue to be required to make daily
cash payments of variation margin. However, if futures contracts have been sold
to hedge portfolio securities, these securities will not be sold until the
offsetting futures contracts can be purchased. Similarly, if futures have been
bought to hedge anticipated securities purchases, the purchases will not be
executed until the offsetting futures contracts can be sold.
The hours of trading of interest rate futures may not conform to the hours
during which the series may trade municipal securities. To the extent that the
futures markets close before the municipal securities market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange
B-17
<PAGE>
may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that a series would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the sale of underlying securities pursuant to the exercise of put
options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange, (v) the facilities of an exchange
may not at all times be adequate to handle current trading volume or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
When-Issued and Delayed Delivery Securities
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis, in which case delivery and payment normally take place within
one month after the date of the commitment to purchase. The payment obligation
and the interest rate that will be received on the tax-exempt securities are
each fixed at the time the buyer enters into the commitment. The purchase price
for the security includes interest accrued during the period between purchase
and settlement and, therefore, no interest accrues to the economic benefit of
the series until delivery and payment take place. Although a series will only
purchase a tax-exempt security on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the extent that a series remains
substantially fully invested at the same time that it has purchased securities
on a when-issued or delayed delivery basis, the market value of the series'
assets will vary to a greater extent than otherwise. Purchasing a tax-exempt
security on a when-issued or delayed delivery basis can involve a risk that the
yields available in the market when the delivery takes place may be higher than
those obtained on the security so purchased.
A segregated account of each series consisting of cash or liquid high-grade
debt securities equal to the amount of the when-issued and delayed delivery
commitments will be established with the Fund's Custodian and marked to market
daily, with additional cash or liquid high-grade debt securities added when
necessary. When the time comes to pay for when-issued or delayed delivery
securities, the series will meet their respective obligations from then
available cash flow, sale of securities held in a separate account, sale of
other securities or, although they would not normally expect to do so, from the
sale of the when-issued securities themselves (which may have a value greater or
less than the series' payment obligations). The sale of securities to meet such
obligations carries with it a greater potential for the realization of capital
gain, which is not exempt from state or federal income taxes. See "Distributions
and Tax Information."
Each series (other than the money market series) may also purchase municipal
forward contracts. A municipal forward contract is a municipal security which is
purchased on a when-issued basis with delivery taking place up to five years
from the date of purchase. No interest will accrue on the security prior to the
delivery date. The investment adviser will monitor the liquidity, value, credit
quality and delivery of the security under the supervision of the Trustees. The
Fund has obtained a ruling from Florida authorities that such municipal forward
contracts qualify as assets exempt from the Florida intangibles tax.
B-18
<PAGE>
Portfolio Turnover
Portfolio transactions will be undertaken principally to accomplish a
series' objective in relation to anticipated movements in the general level of
interest rates but a series may also engage in short-term trading consistent
with its objective. Securities may be sold in anticipation of a market decline
(a rise in interest rates) or purchased in anticipation of a market rise (a
decline in interest rates) and later sold. In addition, a security may be sold
and another purchased at approximately the same time to take advantage of what
the investment adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, due to such factors as changes in the
overall demand for or supply of various types of tax-exempt securities or
changes in the investment objectives of investors.
The Fund's investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by a series is known as "portfolio turnover" and may involve the
payment by the series of dealer mark-ups or underwriting commissions, and other
transaction costs on the sale of securities, as well as on the reinvestment of
the proceeds in other securities. Portfolio turnover rate for a fiscal year is
the ratio of the lesser of purchases or sales of portfolio securities to the
monthly average of the value of portfolio securities--excluding securities whose
maturities at acquisition were one year or less. A series' portfolio turnover
rate will not be a limiting factor when the Fund deems it desirable to sell or
purchase securities. For the fiscal year ended August 31, 1995, the portfolio
turnover rate of each series, other than the money market series, was as
follows:
<TABLE>
<CAPTION>
Portfolio
Series Turnover Rate
- ----------------------------------------------------------------------------- --------------
<S> <C>
Florida...................................................................... 65%
Hawaii Income................................................................ 75%
Maryland..................................................................... 49%
Massachusetts................................................................ 36%
Michigan..................................................................... 33%
New Jersey................................................................... 37%
New York..................................................................... 57%
North Carolina............................................................... 28%
Ohio......................................................................... 38%
Pennsylvania................................................................. 19%
</TABLE>
Illiquid Securities
A series may invest up to 15% (10% in the case of the money market series)
of its net assets in illiquid securities, including repurchase agreements which
have a maturity of longer than seven days, securities with legal or contractual
restrictions on resale (restricted securities) and securities that are not
readily marketable. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period. Mutual funds do not typically hold a
significant amount of illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of illiquid securities promptly or at reasonable prices and
might thereby experience difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the series' limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security,
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the security, and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease, (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease, (3) in the case of unrated
B-19
<PAGE>
municipal lease obligations, an analysis of factors similar to that performed by
nationally recognized statistical rating organizations in evaluating the credit
quality of a municipal lease obligation, including (i) whether the lease can be
cancelled, (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold, (iii) the strength of the lessee's general
credit (E.G., its debt, administrative, economic and financial characteristics),
(iv) the likelihood that the municipality will discontinue appropriating funding
for the leased property because the property is no longer deemed essential to
the operations of the municipality (E.G., the potential for an event of
non-appropriation) and (v) the legal recourse in the event of failure to
appropriate and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser.
Repurchase Agreements
The series' repurchase agreements will be collateralized by U.S. Government
obligations. The series will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees. The
Fund's investment adviser will monitor the creditworthiness of such parties
under the general supervision of the Trustees. In the event of a default or
bankruptcy by a seller, the series will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the series will suffer a loss.
The series participate in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any uninvested cash balances of the
series may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund or series participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities (as
defined above).
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions.
For the purpose of this restriction, the deposit or payment by the Fund
(except with respect to the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New York Money Market Series and the
New Jersey Money Market Series) of initial or maintenance margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may on behalf of a series borrow up to 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction,
the preference as to shares of a series in liquidation and as to dividends
over all other series of the Fund with respect to assets specifically
allocated to that series, the purchase and sale of futures contracts and
related options, collateral arrangements with respect to margin for futures
contracts, the writing of related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the
B-20
<PAGE>
New Jersey Money Market Series) and obligations of the Fund to Trustees
pursuant to deferred compensation arrangements, are not deemed to be a
pledge of assets or the issuance of a senior security. The Fund will not
purchase portfolio securities if its borrowings exceed 5% of the assets.
4. Purchase any security if as a result, with respect to 75% of a
series' total assets (except with respect to the Connecticut Money Market
Series, the Florida Series, the Hawaii Income Series, the Massachusetts
Money Market Series, the New Jersey Money Market Series and the New York
Income Series), more than 5% of the total assets of any series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and
interest either by the U.S. Government or its agencies or
instrumentalities).
5. Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, although it may purchase and sell financial
futures contracts and related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series),
securities which are secured by real estate and securities of companies
which invest or deal in real estate.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
7. Invest in interests in oil, gas or other mineral exploration or
development programs.
8. Make loans, except through repurchase agreements.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
In order to comply with certain state "blue sky" restrictions, the Fund will
not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or programs.
2. Purchase warrants if as a result the Fund would then have more than
5% of its net assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange
or American Stock Exchange will be limited to 2% of the Fund's net assets
(determined at the time of investment). For the purpose of this limitation,
warrants acquired in units or attached to securities are deemed to be
without value.
3. Purchase any interests in real estate limited partnerships which are
not readily marketable.
4. Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
5. Purchase the securities of any one issuer if any officer or trustee
of the Fund or the Manager or Subadviser owns more than 1/2 of 1% of the
outstanding securities of such issuer, and such officers and trustees who
own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding
securities of such issuer.
6. Invest more than 5% of its total assets in securities of unseasoned
issuers, including their predecessors, which have been in operation for less
than three years and equity securities of issuers which are not readily
marketable.
B-21
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position with Fund During Past 5 Years
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Edward D. Beach(70)................ Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; previously, Vice Chairman of Broyhill
Management, Inc. Furniture Industries, Inc.; Certified Public Accountant;
One Seaport Plaza Secretary and Treasurer of Broyhill Family Foundation, Inc.;
New York, NY Member of the Board of Trustees of Mars Hill College;
President, Treasurer and Director of The High Yield Plus
Fund, Inc. and First Financial Fund, Inc.; Director of The
Global Government Plus Fund, Inc. and The Global Total
Return Fund, Inc.
Eugene C. Dorsey(68)............... Trustee Retired President, Chief Executive Officer and Trustee of the
c/o Prudential Mutual Fund Gannett Foundation (now Freedom Forum); former Publisher of
Management, Inc. four Gannett newspapers and Vice President of Gannett
One Seaport Plaza Company; past Chairman of Independent Sector (national
New York, NY coalition of philanthropic organizations); former Chairman
of the American Council for the Arts; Director of the
Advisory Board of Chase Manhattan Bank of Rochester and The
High Yield Income Fund, Inc.
Delayne Dedrick Gold(57)........... Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
*Harry A. Jacobs, Jr.(74)........... Trustee Senior Director (since January 1986) of Prudential Securities
One Seaport Plaza Incorporated (Prudential Securities); formerly Interim
New York, NY Chairman and Chief Executive Officer of Prudential Mutual
Fund Management, Inc. (PMF) (June-September 1993); formerly
Chairman of the Board of Prudential Securities (1982-1985)
and Chairman of the Board and Chief Executive Officer of
Bache Group Inc. (1977-1982); Director of the Center for
National Policy, The First Australia Fund, Inc., The First
Australia Prime Income Fund, Inc., The Global Government
Plus Fund, Inc. and The Global Total Return Fund, Inc.;
Trustee of the Trudeau Institute.
<FN>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position with Fund During Past 5 Years
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Thomas T. Mooney(53)........ Trustee President of the Greater Rochester Metro Chamber
c/o Prudential Mutual Fund of Commerce; formerly Rochester City Manager;
Management, Inc. Trustee of Center for Governmental Research,
One Seaport Plaza Inc.; Director of Monroe County Water Authority,
New York, NY Rochester Jobs, Inc., Blue Cross of Rochester,
Executive Service Corps of Rochester, Monroe
County Industrial Development Corporation,
Northeast Midwest Institute, First Financial
Fund, Inc., The Global Government Plus Fund,
Inc., The Global Total Return Fund, Inc. and The
High Yield Plus Fund, Inc.
Thomas H. O'Brien(70)....... Trustee President of O'Brien Associates (Financial and
c/o Prudential Mutual Fund Management Consultants) (since April 1984);
Management, Inc. formerly President of Jamaica Water Securities
One Seaport Plaza Corp. (holding company) (February 1989-August
New York, NY 1990); Director (September 1987-April 1991) and
Chairman of the Board and Chief Executive
Officer (September 1987-February 1989) of
Jamaica Water Supply Company; Director of
Ridgewood Savings Bank and Yankee Energy System,
Inc.; Trustee of Hofstra University.
*Richard A. Redeker(52)...... President and President, Chief Executive Officer and Director
One Seaport Plaza Trustee (since October 1993) of PMF; Executive Vice
New York, NY President, Director and Member of Operating
Committee (since October 1993), Prudential
Securities; Director (since October 1993),
Prudential Securities Group, Inc.; Executive
Vice President, The Prudential Investment
Corporation (since January 1994); formerly
Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September
1978-September 1993); President and Director of
The Global Government Plus Fund, Inc., The
Global Total Return Fund Inc. and The High Yield
Income Fund, Inc.
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential Securities or PMF.
</TABLE>
B-23
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Position with Fund During Past 5 Years
- ------------------------------------ ------------------ --------------------------------------------------------------
<S> <C> <C>
Nancy H. Teeters(65)........ Trustee Economist; formerly Vice President and Chief
c/o Prudential Mutual Fund Economist (March 1986-June 1990) of
Management, Inc. International Business Machines Corporation;
One Seaport Plaza Director of Inland Steel Industries (since July
New York, NY 1991), First Financial Fund, Inc. and The Global
Total Return Fund, Inc.
Robert F. Gunia(48)......... Vice Chief Administrative Officer (since July 1990),
One Seaport Plaza President Director (since January 1989), Executive Vice
New York, NY President, Treasurer and Chief Financial Officer
(since June 1987) of PMF; Senior Vice President
(since March 1987) of Prudential Securities;
Vice President and Director of The Asia Pacific
Fund, Inc. (since May 1989).
S. Jane Rose(49)............ Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice
New York, NY President (June 1987-December 1990) of PMF;
Senior Vice President and Senior Counsel (since
June 1992) of Prudential Securities; formerly
Vice President and Associate General Counsel of
Prudential Securities.
Grace Torres(36)............ Treasurer and First Vice President (since March 1994) of PMF;
One Seaport Plaza Principal First Vice President (since March 1994) of
New York, NY Financial and Prudential Securities; prior thereto, Vice
Accounting President of Bankers Trust Corporation.
Officer
Ronald Amblard(37).......... Assistant First Vice President (since January 1994) and
One Seaport Plaza Secretary Associate General Counsel (since January 1992) of
New York, NY PMF; Vice President and Associate General
Counsel of Prudential Securities (since January
1992); formerly, Assistant General Counsel
(August 1988-December 1991), Associate Vice
President (January 1989-December 1990) and Vice
President (January 1991-December 1993) of PMF.
Deborah A. Docs(37)......... Assistant Vice President and Associate General Counsel
One Seaport Plaza Secretary (since January 1993) of PMF; Vice President and
New York, NY Associate General Counsel (since January 1993)
of Prudential Securities; previously Associate
Vice President (January 1990-December 1992),
Assistant Vice President (January 1989-December
1989) and Assistant General Counsel (November
1991-
December 1992) of PMF.
</TABLE>
B-24
<PAGE>
Trustees and officers of the Fund are also Trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $9,000, in
addition to certain out-of-pocket expenses. Mr. Dorsey receives his Trustees'
fee pursuant to a deferred fee agreement with the Fund. Under the terms of the
agreement, the Fund accrues daily the amount of such Trustees' fees which accrue
interest at a rate equivalent to the prevailing rate applicable to 90-day U.S.
Treasury Bills at the beginning of each calendar quarter or, pursuant to an SEC
Exemptive order, at the daily rate of return of the Fund (the Fund rate).
Payment of the interest so accrued is also deferred and accruals become payable
at the option of the Trustee. The Fund's obligation to make payments of deferred
Trustees' fees, together with interest thereon, is a general obligation of the
Fund.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72 except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Jacobs and
O'Brien are scheduled to retire on December 31, 1999, 1998 and 1999,
respectively.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended August 31, 1995 to the Trustees who are not affiliated
with the Manager and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PMF (Fund Complex) for the calendar year ended December 31, 1994.
Compensation Table
<TABLE>
<CAPTION>
Total
Pension or Compensation
Retirement From Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation As Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Trustees
- ------------------------------------------ -------------- ----------------- --------------------- --------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee.................. $ 9,000 None N/A $ 159,000(20/39)**
Eugene C. Dorsey, Trustee................. $ 9,000 None N/A $ 61,000*(7/34)**
Delayne Dedrick Gold, Trustee............. $ 9,000 None N/A $ 185,000(24/43)**
Thomas T. Mooney, Trustee................. $ 9,000 None N/A $ 126,000(15/36)**
Thomas H. O'Brien, Trustee................ $ 9,000 None N/A $ 44,000(6/24)**
Nancy H. Teeters, Trustee................. $ 9,000 None N/A $ 95,000(12/28)**
</TABLE>
- --------------
* All compensation for the calendar year ended December 31, 1994 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended August 31, 1995, including accrued interest, amounted to $10,075.
Aggregate compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1994, including accrued interest, amounted
to approximately $61,000.
** Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
As of October 13, 1995, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each series of the Fund.
As of October 13, 1995, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Randall E.L. Falck, revocable trust DTD 12/03/91, FBO
B-25
<PAGE>
Randall E.L. Falck, Randall E.L. Falck Trustee, 8049 Whisper Lake Lane W., Ponte
Vedra, FL 32082 3115, who held 50,921 Class C shares of Florida Series (5.8%);
Joseph R. Rainwater Trustee, Brown V Rainwater Living Trust #1, UA DTD 06/21/86,
P.O. Box 10875, Pensacola, FL 32524-0875, who held 45,997 Class C shares of the
Florida Series (5.2%); Prudential Mutual Fund Management, Inc., Attn. Dennis
Annarumma, One Seaport Plaza, New York, NY 10038-3526, who held 171,851 Class A
shares of Hawaii Income Series (62.5%); Evelyn J. Gerner, Trustee, Amended and
Restated Self Trusted TR UA DTD 09/03/87, 619 Hunakai St., Honolulu, HI
96816-4909, who held 60,986 Class A shares of Hawaii Income Series (22.2%);
Evelyn J. Gerner, Trustee, Amended and Restated Self Trusted TR UA DTD 09/05/87,
619 Hunakai St., Honolulu, HI 96816-4909, who held 60,987 Class B shares of
Hawaii Income Series (8.2%); Erica K. Hsiao, Trustee, C. Hsiao & Erica Hsiao TR
DTD 9/27/83, 1434 Punahou St., Honolulu, Hawaii 96822-4754, who held 43,520
Class B shares of Hawaii Income Series (5.8%); Desmond K. Brooks and Pauline M.
Brooks and Sharon M. Wong, JTWROS C/O INS INC, 210 Ward Ave. #216, Honolulu, HI
96814-4008, who held 4,750 Class C shares of Hawaii Income Series (6.8%); Ralph
S. Tawata & Betty Y. Tawata, JT TEN, 3150 Oahu Ave., Honolulu, HI 96822-1246,
who held 6,274 Class C shares of Hawaii Income Series (9.0%); Saundra Gay
Lormand, Trustee, The Mildred Evelyn Metzler Kraynik RLT UA DTD 1/2/92, FBO
Mildred E. M. Kraynik, 1641 Vancouver Way, Livermore, CA 94550-6133, who held
4,514 Class C shares of Hawaii Income Series (6.4%); Thomas K. Tsubota and
Miyako I. Isubota, Trustees FBO, Thomas K. & Miyuako I. Tsubota REV Living Trust
DTD 04/19/90, 911 11th Ave., Honolulu, HI 96816-2240, who held 10,670 Class C
shares of Hawaii Income Series (15.2%); Miyoko Goto, Trustee FBO Miyoko Goto REV
Living Trust DTD 2/05/83, 2320 Liliha St., Honolulu, HI 96817-1648, who held
5,465 Class C shares of Hawaii Income Series (7.8%); and Trish D. Eustace, 1930
Alaeloa St., Honolulu, HI 96821-1019, who held 6,550 Class C shares of Hawaii
Income Series (9.4%); Henry Nathan II & Elaine T. Nathan, JT TEN, 6222 Roblynn
Road, Laurel, MD 20707-2635, who held 1,416 Class C shares of the Maryland
Series (24.0%); Elbertha S. Cassedy, 506 S. Newkirk St., Baltimore, MD
21224-4429, who held 1,308 Class C shares of Maryland Series (22.1%); Prudential
Securities, Inc., FA Erma N. Ruble, who held 1,025 Class C shares of Maryland
Series (17.3%); Milton Bryant Jr., c/o Universal Systems, Inc., 14585 Avion Pky,
Chantilly, VA 22021-1132, who held 2,153 Class C shares of Maryland Series
(36.4%); Ellen D. Rothberg, 102 West Emerson St., Melrose, MA 02176-3129, who
held 280 Class C shares of Massachusetts Series (22.6%); Penny Boyce, P.O. Box
392, Bolton, MA 01740-0392, who held 94 Class C shares of Massachusetts Series
(7.5%); George Cares & Hope Cares, JT TEN, 356 Maryland Ave., N.E., Grand
Rapids, MI 49503-3940, who held 5,765 Class C shares of Michigan Series (6.8%);
Lester I. Fall, Jr., Cynthia D. Fall, JT TEN, 12460 Lincoln, Burt, MI
48417-9746, who held 1,365 Class C shares of Michigan Series (16.2%); David D.
Verdier, Trustee, The David D. Verdier Trust, UA DTD 06/02/90, 3043 Mary Ave.,
East Grand Rapids, MI 49506-3150, who held 1,291 Class C shares of Michigan
Series (15.3%); Leu Lasevich & Larisa Lasevich, JT TEN, 167 Nathan Drive, North
Brunswick, NJ 08902-1234, who held 7,283 Class C shares of New Jersey Series
(5.3%); Renaldo Sigismondi, 579 Lloyd Road, Aberdeen, NJ 07747-1330, who held
15,061 Class C shares of New Jersey Series (10.0%); Edward J. Thran & Mary Ann
Thran, JT TEN, Lions Head South, 7 Marta Ct., Brick, NJ 08723-7830, who held
16,993 Class C shares of New Jersey Series (12.4%); Richard A. Sperling MD, 25
Sparrowbush Road, Upper Saddle River, NJ 07458-1411, who held 7,818 Class C
shares of New Jersey Series (5.7%); James J. Castello & Frances N. Castello, JT
TEN, 6 Pine Tree Road, Ramsey, NJ 07496-2118, who held 10,298 Class C shares of
New Jersey Series (7.5%); Dolores Truex, 126 Mayetta Landing Road, West Creek,
NJ 08092-3100, who held 19,770 Class C shares of New Jersey Series (19.4%);
Prudential Securities Inc., FA Arsenio Stadile, who held 14,229 Class C shares
of New Jersey Series (10.4%); Kandala K. Chary MD & Vaidehi Chary, JT TEN, 99
Roxbury Pk, East Amherst, NY 14051-1769, who held 3,161 Class C shares of New
York Series (7.1%); Henry Hocker & Gloria Hocker, JT TEN, 15 West Suffolk Ave.,
Central Islip, NY 11722-2142, who held 11,684 Class C shares of New York Series
(26.2%); Shelley Fehrenbach, 2 Cherry Lane, Kings Point, NY 11024-1122, who held
4,683 Class C shares of New York Series (10.5%); Suzanne E. Tyo & Carol Ann Tyo,
JT TEN, 14 Maple Ave., Shortsville, NY 14548-9316, who held 2,717 Class C shares
of New York Series (6.1%); Hannah B. Falk, Parklane Apts., 33 Gates Circle,
Buffalo, NY 14209-1197, who held 2,635 Class C shares of New York Series (5.9%);
Mark A. Pieczonka & Catherine A. Pieczonka, JT TEN, 18 Monett Pl., Greenlawn, NY
11740-1910, who held 9,438 Class C shares of New York Series (21.1%); Steven J.
Sybert, Rosalie B. Sybert, JT TEN, 4509 Coburn Ct., Charlotte, NC 28277-2551,
who held 2,797 Class C shares of North Carolina Series (48.3%); Howard G.
Hochrian, 1200 Dwire Pl., Durham, NC 27706-2515, who held 955 Class C shares of
North Carolina Series (16.5%); S. J. Black and Son, Inc., P.O. Box 1105, Monroe,
NC 28111-1105, who held 838 Class C shares of North Carolina Series (19.5%);
Janet M. Kean,
B-26
<PAGE>
Thomas J. Kean, Co-Trustees, Janet H. Kean Revocable Living Trust, UA DTD
10/30/91, 17404 Randalls Ferry Road, Norwood, NC 28128-7460, who held 978 Class
C shares of North Carolina Series (16.9%); Prudential Securities, Inc., FA
William A. Arthur, who held 1,218 Class C shares of Ohio Series (11.1%); Agnes
M. Jones & Sara J. Warner, JT TEN, 42 Carr St., Jackson, OH 45640-2106, who held
8,846 Class C shares of Ohio Series (80.6%); Dale R. Innan & Diane S. Innan, JT
TEN, 300 High St., Troy, PA 16947-1114, who held 5,074 Class C shares of
Pennsylvania Series (14.8%); Thomas E. Flack & Dorothy E. Flack, JT TEN, 2604
Radcliffe Road, Brodmall, PA 19008-2115, who held 4,775 Class C shares of
Pennsylvania Series (13.9%); Barry L. Joel & Tammy L. Joel, JT TEN, 7386 Beacon
Hill Dr., Pittsburgh, PA 15221-2569, who held 4,056 Class C shares of
Pennsylvania Series (11.8%); Virginia N. Long, 504 Lombard St., Tamaqua, PA
18252-1006, who held 2,514 Class C shares of Pennsylvania Series (7.3%); Henry
E. Hollander & Anita R. Hollander, JT TEN, 149 Autumn Drive, Level Green, PA
15085-1424, who held 3,037 Class C shares of Pennsylvania Series (8.8%).
As of October 13, 1995, Prudential Securities was the record holder for
other beneficial owners of the following shares of the series, representing the
percentage shown of the outstanding shares of each such series:
<TABLE>
<CAPTION>
Series Class A Class B Class C
------------------------- ---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Florida.................. 9,872,943 (84%) 759,014 (88%) 799,595 (91%)
Hawaii Income............ 102,518 (37%) 677,110 (91%) 69,084 (89%)
Maryland................. 956,435 (59%) 1,104,579 (55%) 4,594 (78%)
Massachusetts............ 1,296,831 (56%) 1,226,002 (51%) 1,222 (98%)
Michigan................. 1,102,448 (50%) 1,815,895 (53%) 7,055 (84%)
New Jersey............... 3,638,309 (82%) 17,894,009 (81%) 120,750 (88%)
New York................. 8,354,938 (61%) 9,085,277 (67%) 43,833 (98%)
North Carolina........... 1,566,363 (67%) 2,710,667 (78%) 2,966 (51%)
Ohio..................... 2,221,331 (53%) 2,677,455 (51%) 10,063 (92%)
Pennsylvania............. 2,305,740 (49%) 8,665,614 (45%) 16,333 (78%)
</TABLE>
As of October 13, 1995, Prudential Securities was the record holder for
other beneficial owners of 67,482,240 shares (or 99% of those outstanding) of
the Connecticut Money Market Series, 59,998,344 shares (or 99% of those
outstanding) of the Massachusetts Money Market Series, 217,127,616 shares (or
99% of those outstanding) of the New Jersey Money Market Series and 315,379,244
shares (or 99% of those outstanding) of the New York Money Market Series. In the
event of any meetings of shareholders, Prudential Securities will forward, or
cause the forwarding of, proxy materials to the beneficial owners for which it
is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as manager
to all of the other open-end management investment companies that, together with
the Fund, comprise the Prudential Mutual Funds. See "How the Fund is
Managed--Manager" in the Prospectus of each series. As of September 30, 1995,
PMF managed and/or administered open-end and closed-end management investment
companies with assets of approximately $51 billion. According to the Investment
Company Institute, as of December 31, 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.
B-27
<PAGE>
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended August 31, 1995. Currently, the Fund
believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of a series' average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to the subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
corporate fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of share
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communication expenses with respect to investor services and all expenses of
shareholders' and Trustees' meetings and of preparing, printing and mailing
reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement also provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Trustees of the Fund, including a majority of
the Trustees who are not parties to such contract or interested persons of any
such party as defined in the Investment Company Act, on May 5, 1995 and by
shareholders of each series of the Fund then in existence on December 28, 1988,
by shareholders of the Florida Series and the New Jersey Money Market Series on
December 30, 1991, by the shareholders of the Connecticut Money Market Series
and the Massachusetts Money Market Series on November 10, 1992 and by the sole
shareholder of the Hawaii Income Series on September 19, 1994.
B-28
<PAGE>
The amount of the management fee paid by each series of the Fund to PMF for
the fiscal years ended August 31, 1993, 1994 and 1995 was as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona*............................................................... $ 286,344 $ 313,334 $ 268,246(a)
Connecticut Money Market............................................... -- (b) 63,440(b) 71,379(b)
Florida................................................................ 247,845(c) 311,558(c) 231,778(c)
Georgia*............................................................... 94,559 108,130 86,901(d)
Hawaii Income.......................................................... N/A N/A 41,133(e)
Maryland............................................................... 279,241 290,509 210,311(f)
Massachusetts.......................................................... 286,520 310,614 258,040(g)
Massachusetts Money Market............................................. -- (h) 44,800(h) 53,649(h)
Michigan............................................................... 319,163 383,005 323,133(i)
Minnesota*............................................................. 130,014 136,463 108,549(j)
New Jersey............................................................. 1,236,812(k) 1,347,284(k) 1,047,300(k)
New Jersey Money Market................................................ 523,804(l) 634,767(l) 642,087(l)
New York............................................................... 1,697,889 1,820,106 1,518,552(m)
New York Money Market.................................................. 1,378,198 1,402,462 1,463,815
North Carolina......................................................... 346,561 378,373 313,847(n)
Ohio................................................................... 564,784 630,490 538,657(o)
Pennsylvania........................................................... 1,186,546 1,384,548 1,182,799(p)
</TABLE>
- ------------------------
* No shares of this Series currently are outstanding.
(a) PMF voluntarily waived a portion of its management fee of $19,126.
(b) PMF voluntarily waived all or a portion of its management fee of $265,760,
$243,395 and $214,138, respectively.
(c) PMF voluntarily waived a portion of its management fee of $371,767,
$467,337 and $464,337, respectively.
(d) PMF voluntarily waived a portion of its management fee of $6,103.
(e) PMF voluntarily waived a portion of its management fee of $3,651.
(f) PMF voluntarily waived a portion of its management fee of $14,170.
(g) PMF voluntarily waived a portion of its management fee of $18,492.
(h) PMF voluntarily waived all or a portion of its management fee of $161,228,
$167,335 and $160,946, respectively.
(i) PMF voluntarily waived a portion of its management fee of $22,911.
(j) PMF voluntarily waived a portion of its management fee of $7,592.
(k) PMF voluntarily waived a portion of its management fee of $412,271,
$449,095 and $483,073, respectively.
(l) PMF voluntarily waived a portion of its management fee of $323,145,
$211,404 and $214,029, respectively.
(m) PMF voluntarily waived a portion of its management fee of $108,361.
(n) PMF voluntarily waived a portion of its management fee of $22,350.
(o) PMF voluntarily waived a portion of its management fee of $38,218.
(p) PMF voluntarily waived a portion of its management fee of $84,187.
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
B-29
<PAGE>
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 5,
1995, by shareholders of each series of the Fund then in existence on December
28, 1988, by shareholders of the Florida Series and the New Jersey Money Market
Series on December 30, 1991, by shareholders of the Connecticut Money Market
Series and the Massachusetts Money Market Series on November 10, 1992 and by the
sole shareholder of the Hawaii Income Series on September 19, 1994.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
PMF is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). PMF has three wholly-owned subsidiaries:
Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent) and Prudential Mutual Fund Investment Management,
Inc. PMFS serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Prudential is one of the largest diversified financial services institutions
in the world and, based on total assets, the largest insurance company in North
America as of December 31, 1994. Its primary business is to offer a full range
of products and services in three areas: insurance, investments and home
ownership for individuals and families; health-care management and other benefit
programs for employees of companies and members of groups; and asset management
for institutional clients and their associates. Prudential (together with its
subsidiaries) employs nearly 100,000 persons world-wide, and maintains a sales
force of approximately 19,000 agents, 3,400 insurance brokers and 6,000
financial advisors. It insures or provides other financial services to more than
50 million people worldwide. Prudential is a major issuer of annuities,
including variable annuities. Prudential seeks to develop innovative products
and services to meet consumer needs in each of its business areas.
Investment advisory services are provided to the Fund by a unit of The
Prudential Investment Corporation (PIC or the Subadviser), a subsidiary of
Prudential.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to taxable fixed-income obligations, credit analysts review
financial statements published by corporate (and governmental) issuers to
examine income statements, balance sheets and cash flow numbers. They evaluate
this data against their expectations of sales, earnings growth and trends in
credit ratios. They study the impact of economic, regulatory and political
developments on companies and industries and look at the relative value of
companies. They are in regular communication both in person and by telephone
with company management, Wall Street analysts and rating agencies.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
B-30
<PAGE>
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specified projects and to evaluate the progress of construction or the
operation of a facility.
Peter Allegrini oversees the municipal bond team at the Subadviser. He also
serves as the portfolio manager of the High Yield Series of Prudential Municipal
Bond Fund and the Pennsylvania Series of the Fund. He has been in the investment
business since 1978.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of each
series of the Fund having Class A shares and of the shares of the money market
series and of the shares of the New York Income Series (which are not divided
into classes). Prudential Securities, One Seaport Plaza, New York, New York
10292, acts as the distributor of the Class B and Class C shares of the Fund.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and separate distribution agreements
(the Distribution Agreements), PMFD and Prudential Securities (collectively, the
Distributor) incur the expenses of distributing the Fund's Class A, Class B and
Class C shares. See "How the Fund is Managed--Distributor" in each series'
Prospectus.
Prior to January 22, 1990, the non-money market series of the Fund offered
only one class of shares (the then existing Class B shares). On October 19,
1989, the Trustees, including a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Class A or Class B Plan or in any agreement related to any one
of the Plans (the Rule 12b-1 Trustees), at a meeting called for the purpose of
voting on the Class A and Class B Plans, adopted a new plan of distribution for
the Class A shares of the Fund (the Class A Plan) and approved an amended and
restated plan of distribution with respect to the Class B shares of the Fund
(the Class B Plan). On May 6, 1993, the Trustees, including a majority of the
Rule 12b-1 Trustees, at a meeting called for the purpose of voting on each Plan,
approved the continuance of the Plans and Distribution Agreements and approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .50 of 1% (including the service fee) of the average daily net assets
of the Class B shares (asset-based sales charge) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares. Total
distribution fees (including the service fee of .25 of 1%) may not exceed .50 of
1%. On May 6, 1993, the Trustees, including a majority of the Rule 12b-1
Trustees, at a meeting called for the purpose of voting on the Plans, adopted a
plan of distribution for the Class C shares and approved further amendments to
the plans of distribution for the Fund's Class A and Class B shares changing
them from reimbursement type plans to compensation type plans. Also on May 6,
1993, the Trustees, including a majority of the Rule 12b-1 Trustees, approved a
plan of distribution (the Florida Series' Class C Plan) for the Florida Series'
Class D shares (now called Class C shares). The Plans were last approved by the
Trustees, including a majority of the Rule 12b-1 Trustees, on May 5, 1995. The
Class A Plan, as amended, was approved by Class A and Class B shareholders, the
Class B Plan was approved by Class B shareholders and the Class C Plan was
approved by the Class C shareholders on July 19, 1994. The Florida Series' Class
C Plan was approved by the sole shareholder of the Class C shares of the Florida
Series on June 30, 1993. The Class B Plan was approved by the sole shareholder
of
B-31
<PAGE>
the Florida Series' Class B shares on August 1, 1994. The Class A Plan and Class
B Plan were approved by the sole shareholder of Class A and Class B shares of
the Hawaii Income Series on September 19, 1994. The Class C Plan was approved by
the sole shareholder of Class C shares of the Hawaii Income Series on September
19, 1994 and of the other series having Class C shares on August 1, 1994.
Class A Plan. For the fiscal year ended August 31, 1995, PMFD received the
following payments under the Class A Plan from the series currently in
existence:
<TABLE>
<CAPTION>
Series
- ----------------------------------------------------------------------------------
<S> <C>
Florida........................................................................... $ 82,514
Hawaii Income..................................................................... 2,641
Maryland.......................................................................... 11,341
Massachusetts..................................................................... 15,837
Michigan.......................................................................... 16,932
New Jersey........................................................................ 30,290
New York.......................................................................... 95,024
North Carolina.................................................................... 15,244
Ohio.............................................................................. 29,904
Pennsylvania...................................................................... 30,092
</TABLE>
This amount was primarily expended for payment of account servicing fees to
financial advisers and other persons who sell Class A shares. For the fiscal
year ended August 31, 1995, PMFD also received approximate initial sales charges
with respect to the sale of Class A shares of the currently existing series as
follows:
<TABLE>
<CAPTION>
Series
- --------------------------------------------------------------------------------
<S> <C>
Florida......................................................................... $ 170,300
Hawaii Income................................................................... 19,600
Maryland........................................................................ 3,000
Massachusetts................................................................... 6,800
Michigan........................................................................ 8,100
New Jersey...................................................................... 16,200
New York........................................................................ 39,400
North Carolina.................................................................. 112,600
Ohio............................................................................ 14,300
Pennsylvania.................................................................... 32,000
</TABLE>
Class B Plan. For the fiscal year ended August 31, 1995, Prudential
Securities received the distribution fees paid by the following series of the
Fund and the proceeds of contingent deferred sales charges paid by investors on
the redemption of Class B shares of each currently existing series as set forth
below:
<TABLE>
<CAPTION>
Approximate
Contingent
Deferred
Series Amount of Fee Sales Charges
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Florida........................................................ $ 23,495 $ 7,500
Hawaii Income.................................................. 2,641 12,700
Maryland....................................................... 167,486 134,200
Massachusetts.................................................. 197,277 69,000
Michigan....................................................... 261,080 127,100
New Jersey..................................................... 1,374,973 665,400
New York....................................................... 1,150,164 360,200
North Carolina................................................. 259,815 97,900
Ohio........................................................... 427,051 165,700
Pennsylvania................................................... 1,115,411 427,000
</TABLE>
B-32
<PAGE>
For the fiscal year ended August 31, 1995, it is estimated that Prudential
Securities spent approximately the following amounts on behalf of the currently
existing series of the Fund:
<TABLE>
<CAPTION>
Compensation Approximate
Printing and Commission to Prusec* for Total
Mailing Payments to Commission Amount
Prospectuses Financial Payments to Spent By
to Other Advisers of Overhead Costs Representatives Distributor
Than Current Prudential of Prudential and Other on Behalf of
Series Shareholders Securities Securities** Expenses** Series
- -------------------- ------------ ----------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Florida............. $ 4,700 $ 36,200 $ 318,600 $ 16,400 $ 375,900
Hawaii Income....... 6,400 95,700 142,500 500 245,100
Maryland............ 8,800 53,700 15,000 13,400 90,900
Massachusetts....... 11,700 57,300 32,800 20,500 122,300
Michigan............ 8,600 82,600 49,200 30,100 170,500
New Jersey.......... 15,100 393,400 200,300 64,400 673,200
New York............ 10,400 397,700 176,000 110,000 694,200
North Carolina...... 8,500 77,100 43,000 15,500 144,100
Ohio................ 9,900 119,700 58,000 93,000 280,600
Pennsylvania........ 12,400 327,600 171,300 215,000 726,300
<FN>
- ------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
</TABLE>
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Prusec in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communication costs and
the costs of stationery and supplies, (b) the cost of client sales seminars, (c)
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (d) other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus of each applicable series of the Fund. The amount of
distribution expenses reimbursable by the Fund is reduced by the amount of such
contingent deferred sales charges.
Class C Plan. For the fiscal year ended August 31, 1995, Prudential
Securities received the distribution fees paid by the following series of the
Fund under the Class C Plan and the proceeds of contingent deferred sales
charges paid by investors on the redemption of shares of each currently existing
series as set forth below:
<TABLE>
<CAPTION>
Approximate
Contingent
Deferred
Sales
Series Amount of Fee Charges
- -------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Florida....................................................... $ 76,991 $ 1,000
Hawaii Income................................................. 29,804 100
Maryland...................................................... 437 --
Massachusetts................................................. 104 --
Michigan...................................................... 458 --
New Jersey.................................................... 5,924 100
New York...................................................... 2,439 --
North Carolina................................................ 241 100
Ohio.......................................................... 458 --
Pennsylvania.................................................. 1,672 600
</TABLE>
Distribution fees were expended primarily for payment of account servicing
fees.
Pursuant to Rule 12b-1, the Plans and the money market series' Plan of
Distribution (collectively, the Plans) were last approved by the Trustees of the
Fund, including the Rule 12b-1 Trustees, at a meeting called for the purpose of
voting on the Plans on May 5, 1995.
B-33
<PAGE>
The Plans provide that they shall continue in effect from year to year with
respect to each series, provided such continuance is approved annually by a vote
of the Trustees of the Fund in the manner described above. The Plans may not be
amended to increase materially the amount to be spent for the services described
therein without approval of the shareholders of the applicable class (by both
Class A and Class B shareholders, voting separately, in the case of material
amendments to the Class A Plan), and all material amendments are required to be
approved by the Trustees in the manner described above. Each Plan may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Rule 12b-1 Trustees, or by a vote of a majority of the outstanding voting
securities of the applicable class on not more than 60 days' nor less than 30
days' written notice to any other party to the Plans. Each Plan will
automatically terminate in the event of its assignment. The Fund will not be
contractually obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities and PMFD to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. The
Distribution Agreements were last approved by the Trustees, including a majority
of the Rule 12b-1 Trustees, on May 5, 1995.
The Connecticut Money Market, Massachusetts Money Market, New Jersey Money
Market, and the New York Money Market Series' Plan of Distribution (the Money
Market Plan) was last approved by the Trustees of the Fund, including a majority
of the Rule 12b-1 Trustees, at a meeting called for the purpose of voting on the
Money Market Plan, on May 5, 1995. The Money Market Plan was approved by
shareholders of the New York Money Market Series on December 28, 1988, by
shareholders of the New Jersey Money Market Series on December 30, 1991 and by
shareholders of the Connecticut Money Market Series and Massachusetts Money
Market Series on November 10, 1992. For the fiscal year ended August 31, 1995,
PMFD incurred distribution expenses with respect to the money market series, all
of which were recovered by PMFD through the distribution fee paid by the series,
as follows:
<TABLE>
<CAPTION>
Distribution
Series Expenses
- ----------------------------------------------------------------------------------------- ------------
<S> <C>
Connecticut Money Market................................................................. $ 71,379
Massachusetts Money Market............................................................... 53,649
New Jersey Money Market.................................................................. 214,029
New York Money Market.................................................................... 365,954
</TABLE>
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
B-34
<PAGE>
findings that PSI's conduct violated the federal securities laws and that an
order issued by the SEC in 1986 requiring PSI to adopt, implement and maintain
certain supervisory procedures had not been complied with; (ii) directed PSI to
cease and desist from violating the federal securities laws and imposed a $10
million civil penalty; and (iii) required PSI to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of Directors.
Pursuant to the terms of the SEC settlement, PSI established a settlement fund
in the amount of $330,000,000 and procedures, overseen by a court approved
Claims Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
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
B-35
<PAGE>
occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid. The Fund will not
deal with Prudential Securities in any transaction in which Prudential
Securities acts as principal. Thus it will not deal in over-the-counter
securities with Prudential Securities acting as a market maker, and it will not
execute a negotiated trade with Prudential Securities if execution involves
Prudential Securities' acting as principal with respect to any part of the
Fund's order.
In placing orders for portfolio securities for each series of the Fund, the
Manager is required to give primary consideration to obtaining the most
favorable price and efficient execution. The Manager seeks to effect each
transaction at a price and commission, if any, that provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. Within the
framework of this policy, the Manager will consider the research and investment
services provided by brokers, dealers or futures commission merchants who effect
or are parties to portfolio transactions of the Fund, the Manager or the
Manager's other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Manager in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other investment
accounts. Conversely, brokers, dealers or futures commission merchants
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than the Fund, and
the services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker based
on the quality and quantity of execution services provided by the broker, dealer
or futures commission merchant in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers, other than Prudential
Securities, for particular transactions than might be charged if a different
broker had been selected, on occasions when, in the Manager's opinion, this
policy furthers the objective of obtaining best price and execution. The Manager
is authorized to pay higher commissions on brokerage transactions for the Fund
to brokers other than Prudential Securities in order to secure the research and
investment services described above, subject to review by the Fund's Trustees
from time to time as to the extent and continuation of this practice. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Fund's Trustees. Portfolio securities may not be purchased
from any underwriting or selling syndicate of which Prudential Securities (or
any affiliate), during the existence of the syndicate, is a principal
underwriter (as defined in the Investment Company Act), except in accordance
with rules of the SEC. This limitation, in the opinion of the Fund, will not
significantly affect the series' ability to pursue their present investment
objectives. However, in the future in other circumstances, the series may be at
a disadvantage because of this limitation in comparison to other funds with
similar objectives but not subject to such limitations.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers or futures commission merchants in
connection with comparable transactions involving similar securities or futures
contracts being purchased or sold on an exchange or board of trade during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be expected
to be received by an unaffiliated broker or futures commission merchant in a
commensurate arm's-length transaction. Furthermore, the Trustees of the Fund,
including a majority of the non-interested Trustees, have adopted procedures
which are reasonably designed to provide that any commissions, fees or other
remuneration paid to Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage and
futures transactions with Prudential Securities (or any affiliate) are also
subject to such fiduciary standards as may be imposed upon Prudential Securities
(or such affiliate) by applicable law.
B-36
<PAGE>
During the fiscal years ended August 31, 1995, 1994 and 1993, the series
paid brokerage commissions on certain futures transactions as set forth below.
During these periods, the series paid no brokerage commissions to Prudential
Securities.
<TABLE>
<CAPTION>
Brokerage Commissions
-------------------------------
Series 1995 1994 1993
- ------------------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Connecticut Money Market...................................................... 0 0 0
Florida....................................................................... $ 10,973 $ 4,113 $ 2,013
Hawaii Income................................................................. 1,680 N/A N/A
Maryland...................................................................... 5,513 613 437
Massachusetts................................................................. 1,820 263 613
Massachusetts Money Market.................................................... 0 0 0
Michigan...................................................................... 4,550 2,030 3,623
New Jersey.................................................................... 17,098 875 0
New Jersey Money Market....................................................... 0 0 0
New York...................................................................... 13,581 0 2,415
New York Money Market......................................................... 0 0 0
North Carolina................................................................ 20,213 175 875
Ohio.......................................................................... 15,698 4,953 1,418
Pennsylvania.................................................................. 22,033 875 2,468
</TABLE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each series of the Fund, other than the money market series, may
be purchased at a price equal to the next determined net asset value per share
plus a sales charge which, at the election of the investor, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). See "Shareholder Guide--How to Buy Shares of the
Fund" in each series' Prospectus. The series (other than the money market series
and the New York Income Series) issue three classes of shares, designated Class
A, Class B and Class C shares. Class C shares of the Florida Series were
formerly called Class D shares.
Each class of shares represents an interest in the same portfolio of
investments of the series and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment
Account--Exchange Privilege."
For a description of the methods of purchasing shares of the Connecticut
Money Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series or the New York Money Market Series, see "Shareholder Guide--How
to Buy Shares of the Fund" in the money market series' Prospectuses.
B-37
<PAGE>
Specimen Price Make-Up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B* and Class C* shares are sold at net asset value. Using the net asset value at
August 31, 1995 of each series currently in existence (other than the
Connecticut Money Market Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series and the New York Money Market Series), the maximum
offering price of the series' shares is as follows:
<TABLE>
<CAPTION>
Class A FL HI MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value and redemption price per
Class A share.......................... $10.06 $12.13 $10.66 $11.63 $11.89 $10.98 $11.91 $11.19 $11.92 $10.55
Maximum sales charge (3% of offering
price)................................. .31 .38 .33 .36 .37 .34 .37 .35 .37 .33
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Offering price to public................ $10.37 $12.51 $10.99 $11.99 $12.26 $11.32 $12.28 $11.54 $12.29 $10.88
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
Class B FL HI MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class B
share*................................. $10.06 $12.13 $10.67 $11.62 $11.88 $10.98 $11.91 $11.19 $11.93 $10.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
Class C FL HI MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class C
share*................................. $10.06 $12.13 $10.67 $11.62 $11.88 $10.98 $11.91 $11.19 $11.93 $10.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<FN>
- --------------
*Class B and Class C shares are subject to a contingent deferred sales charge on
certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus of each applicable
series.
</TABLE>
Reduction and Waiver of Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the applicable Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings.
B-38
<PAGE>
Rights of Accumulation. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectuses. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charge will be
granted subject to confirmation of the investor's holdings.
Letters of Intent. Reduced sales charges are also available to investors or
an eligible group of related investors who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of the
Fund and shares of other Prudential Mutual Funds. All shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through Prudential Securities will not be aggregated to determine the
reduced sales charge. All shares must be held either directly with the Transfer
Agent or through Prudential Securities. The Distributor must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and the sales charge actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
B-39
<PAGE>
Waiver of the Contingent Deferred Sales Charge--Class B Shares
The contingent deferred sales charge is waived under circumstances described
in the applicable Prospectuses. See Shareholder Guide--How to Sell Your
Shares--Waiver of the Contingent Deferred Sales Charges-- Class B Shares" in the
Prospectuses. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<S> <C>
Category of Waiver Required Documentation
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in any award letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
Quantity Discount--Class B Shares Purchased Prior to August 1, 1994
The CDSC is reduced on redemptions of Class B shares of a series of the Fund
purchased prior to August 1, 1994 if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of a series of the Fund owned
by you in a single account exceeded $500,000. For example, if you purchased
$100,000 of Class B shares of a series of the Fund and the following year
purchase an additional $450,000 of Class B shares with the result that the
aggregate cost of your Class B shares of a series of the Fund following the
second purchase was $550,000, the quantity discount would be available for the
second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of Dollars Invested
or Redemption Proceeds
Year Since Purchase -----------------------------------------
Payment Made $500,001 to $1 million Over $1 million
- ------------------------- ----------------------- ---------------
<S> <C> <C>
First.................... 3.0% 2.0%
Second................... 2.0% 1.0%
Third.................... 1.0% 0%
Fourth and thereafter.... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a series. An investor
may direct the Transfer Agent in writing by the first business day of the month
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of
B-40
<PAGE>
recently purchased shares for which registration instructions have not been
received on the record date, cash payment will be made directly to the dealer.
Any shareholder who receives a cash payment representing a dividend or
distribution may reinvest such dividend or distribution at net asset value
(without a sales charge) by returning the check or the proceeds to the Transfer
Agent within 30 days after the payment date. The investment will be made at the
net asset value per share next determined after receipt of the check or proceeds
by the Transfer Agent. Such shareholder will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
Exchange Privilege
Each series makes available to its shareholders the privilege of exchanging
their shares of a series for shares of other series of the Fund and certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential Mutual Funds may also be exchanged for
shares of the Fund. All exchanges are made on the basis of relative net asset
value next determined after receipt of an order in proper form. An exchange will
be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of other series of the Fund or certain other Prudential Mutual
Funds, shares of Prudential Government Securities Trust (Short-Intermediate Term
Series) and shares of the money market funds specified below. No fee or sales
load will be imposed upon the exchange. Shareholders of money market funds who
acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
Class B and Class C. Shareholders of each series may exchange their Class B
and Class C shares for Class B and Class C shares, respectively, of other series
of the Fund or certain other Prudential Mutual Funds and shares of Prudential
Special Money Market Fund, a money market fund. No CDSC will be payable upon
such exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of the exchange. The applicable sales charge
will be that imposed by the fund in which shares were initially purchased and
the purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund without imposition of any CDSC at the time
of exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated by
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the
B-41
<PAGE>
CDSC holding period, exchanges are deemed to have been made on the last day of
the month.Thus, if shares are exchanged into the Fund from a money market fund
during the month (and are held in the Fund at the end of the month), the entire
month will be included in the CDSC holding period. Conversely, if shares are
exchanged into a money market fund prior to the last day of the month (and are
held in the money market fund on the last day of the month), the entire month
will be excluded from the CDSC holding period. For purposes of calculating the
seven year holding period applicable to the Class B conversion feature, the time
period during which Class B shares were held in a money market fund will be
excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of a series, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C Exchange Privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
Dollar Cost Averaging (not applicable to the money market series)
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
Period of
Monthly Investments: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years.......................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................... 176 264 352 440
15 Years.......................................... 296 444 592 740
10 Years.......................................... 555 833 1,110 1,338
5 Years.......................................... 1,371 2,057 2,742 3,428
<FN>
See "Automatic Savings Accumulation Plan."
- ------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
B-42
<PAGE>
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a series monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the series. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
Systematic Withdrawal Plan
A withdrawal plan is available to shareholders through Prudential Securities
or the Transfer Agent. Such withdrawal plan provides for monthly or quarterly
checks in any amount, except as provided below, up to the value of the shares in
the shareholder's account. Withdrawals of Class B or Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares--Contingent
Deferred Sales Charges" in the Prospectus of each applicable series.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic withdrawal payment. The systematic withdrawal plan may be
terminated at any time, and the Distributor reserves the right to initiate a fee
of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan.
How to Redeem Shares of the Money Market Series
Redemption orders submitted to and received by Prudential Mutual Fund
Services, Inc. (PMFS) will be effected at the net asset value next determined
after receipt of the order. Shareholders of the Connecticut Money Market Series,
the Massachusetts Money Market Series, the New Jersey Money Market Series and
the New York Money Market Series (other than Prudential Securities clients for
whom Prudential Securities has purchased shares of such Series) may use Check
Redemption, Expedited Redemption or Regular Redemption.
CHECK REDEMPTION
Shareholders are subject to the Custodian's rules and regulations governing
checking accounts, including the right of the Custodian not to honor checks in
amounts exceeding the value of the shareholder's account at the time the check
is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 10 days after receipt of the purchase check by PMFS unless
the Fund or PMFS has been advised that the purchase check has been honored. Such
delay may be avoided by purchasing shares by certified or official bank checks
or by wire. If insufficient shares are in the account, or if the purchase was
made by check within 10 days, the check is returned marked "insufficient funds."
Since the dollar value of an account is constantly
B-43
<PAGE>
changing, it is not possible for a shareholder to determine in advance the total
value of his or her account so as to write a check for the redemption of the
entire account. Checks in an amount less than $500 will not be honored.
There is a service charge of $5.00 payable to PMFS to establish a checking
account and to order checks. The Custodian and the Fund have reserved the right
to modify this checking account privilege or to impose a charge for each check
presented for payment for any individual account or for all accounts in the
future.
The Fund or PMFS may terminate Check Redemption at any time upon 30 days'
notice to participating shareholders. To receive further information, contact
Prudential Mutual Fund Services, Inc., Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
EXPEDITED REDEMPTION
To request Expedited Redemption by telephone, a shareholder should call PMFS
at (800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time. Requests by letter should be addressed to Prudential Mutual Fund Services,
Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015.
In order to change the name of the commercial bank or account designated to
receive redemption proceeds, it is necessary to execute a new Expedited
Redemption Authorization Form and submit it to PMFS at the address set forth
above. Requests to change a bank or account must be signed by each shareholder
and each signature must be guaranteed by: (a) a commercial bank which is a
member of the Federal Deposit Insurance Corporation; (b) a trust company; or (c)
a member firm of a domestic securities exchange. Guarantees must be signed by an
authorized signatory of the bank, trust company or member firm, and "Signature
Guaranteed" should appear with the signature. Signature guarantees by savings
banks, savings and loan associations and notaries will not be accepted. PMFS may
request further documentation from corporations, executors, administrators,
trustees or guardians.
To receive further information, investors should contact PMFS at (800)
225-1852.
REGULAR REDEMPTION
Shareholders may redeem their shares by sending to PMFS, at the address set
forth above, a written request, accompanied by duly endorsed share certificates,
if issued. If the proceeds of the redemption (a) exceed $50,000, (b) are to be
paid to a person other than the record owner, (c) are to be sent to an address
other than the address on the Transfer Agent's records or (d) are to be paid to
a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential District or Ordinary offices. The Fund may change the
signature guarantee requirements from time to time on notice to shareholders,
which may be given by means of a new Prospectus. All correspondence concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010. Regular redemption is made by check sent to
the shareholder's address.
Mutual Fund Programs
From time to time, the Fund (or a portfolio of the Fund) may be included in
a mutual fund program with other Prudential Mutual Funds. Under such a program,
a group of portfolios will be selected and thereafter promoted collectively.
Typically, these programs are created with an investment theme, E.G., to seek
greater diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning
B-44
<PAGE>
the appropriate blend of portfolios for them. If investors elect to purchase the
individual mutual funds that constitute the program in an investment ratio
different from that offered by the program, the standard minimum investment
requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share of a series is the net worth of such series
(assets including securities at value minus liabilities) divided by the number
of shares of such series outstanding. Net asset value is calculated separately
for each class. The Fund will compute the net asset value of each such series
(except the money market series) once daily at 4:15 P.M., New York time, on days
the New York Stock Exchange is open for trading, except on days on which no
orders to purchase, sell or redeem shares of the series have been received or on
days on which changes in the value of the series' portfolio securities do not
affect net asset value. The Fund will compute the net asset value of the money
market series at 4:30 P.M., New York time, on days the New York Stock Exchange
is open for trading, except on days on which no orders to purchase, sell or
redeem shares of the money market series have been received or on days on which
changes in the value of the money market series' portfolio securities do not
affect net asset value. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time (with respect to shares of the non-money market
series of the Fund) and between such closing and 4:30 P.M., New York time (with
respect to the money market series of the Fund).
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Securities for which market quotations are not
readily available are valued at fair value in accordance with procedures adopted
by the Trustees. Under these procedures the Fund values municipal securities on
the basis of valuations provided by a pricing service which uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The Trustees believe that reliable market
quotations are generally not readily available for purposes of valuing
tax-exempt securities. As a result, depending on the particular tax-exempt
securities owned by the Fund, it is likely that most of the valuations for such
securities will be based upon fair value determined under the foregoing
procedures. Short-term investments which mature in less than 60 days are valued
at amortized cost, if their original term to maturity was less than 60 days, or
are valued at amortized cost on the 60th day prior to maturity, if their
original term to maturity when acquired by the Fund was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
The money market series use the amortized cost method to determine the value
of their portfolio securities in accordance with regulations of the SEC. The
amortized cost method involves valuing a security at its cost and amortizing any
discount or premium over the period until maturity. The method does not take
into account unrealized capital gains and losses which may result from the
effect of fluctuating interest rates on the market value of the security.
With respect to the money market series, the Trustees have determined to
maintain a dollar-weighted average portfolio maturity of 90 days or less, to
purchase instruments having remaining maturities of thirteen months or less and
to invest only in securities determined by the investment adviser under the
supervision of the Trustees to present minimal credit risks and to be of
"eligible quality" in accordance with regulations of the SEC. The Trustees have
adopted procedures designed to stabilize, to the extent reasonably possible, the
money market series' price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures will include review of the money market
series' portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the money market series' net asset value
calculated by using available market quotations deviates from $1.00 per share
based on amortized cost. The extent of any deviation will be examined by the
Trustees. If such deviation exceeds 1/2 of 1%, the Trustees will promptly
consider what action, if any, will be initiated. In the event the Trustees
determine that a deviation exists which may result in material dilution or other
unfair results to prospective investors or existing shareholders, the Trustees
will take such corrective action as they consider necessary and appropriate,
including the sale of portfolio instruments prior
B-45
<PAGE>
to maturity to realize capital gains or losses or to shorten average portfolio
maturity, the withholding of dividends, redemptions of shares in kind, or the
use of available market quotations to establish a net asset value per share.
PERFORMANCE INFORMATION
ALL SERIES (EXCEPT THE MONEY MARKET SERIES)
Yield. Each series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B and
Class C shares. The yield will be computed by dividing the series' net
investment income per share earned during this 30-day period by the net asset
value per share on the last day of this period. The average number of shares
used in determining the net investment income per share will be the average
daily number of shares outstanding during the 30-day period that were eligible
to receive dividends. In accordance with SEC regulations, income will be
computed by totaling the interest earned on all debt obligations during the
30-day period and subtracting from that amount the total of all recurring
expenses incurred during the period, which includes management and distribution
fees. The 30-day yield is then annualized on a bond-equivalent basis assuming
semi-annual reinvestment and compounding of net investment income, as described
in the Prospectus of each series. The yield for the 30 days ended August 31,
1995 and the yield without the management subsidies and waivers were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
--------------------------- --------------------------- ---------------------------
Yield Subsidy/ Yield Subsidy/ Yield Subsidy/
Series Yield Waiver Adjusted Yield Waiver Adjusted Yield Waiver Adjusted
- -------------------- ------- ----------------- ------- ----------------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Florida............. 5.6% 4.6% 5.3% 4.3% 5.1% 4.1%
Hawaii Income....... 5.2 5.1 5.0 4.9 4.7 4.6
Maryland............ 3.7 3.7 3.5 3.4 3.2 3.1
Massachusetts....... 4.6 4.6 4.4 4.3 4.1 4.1
Michigan............ 4.7 4.6 4.4 4.4 4.2 4.1
New Jersey.......... 5.0 4.9 4.8 4.6 4.5 4.4
New York............ 4.8 4.8 4.6 4.5 4.3 4.3
North Carolina...... 4.7 4.6 4.4 4.4 4.2 4.1
Ohio................ 4.6 4.5 4.3 4.3 4.1 4.0
Pennsylvania........ 4.8 4.7 4.5 4.5 4.3 4.2
</TABLE>
The series' yield is computed according to the following formula:
<TABLE>
<S> <C> <C>
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
</TABLE>
<TABLE>
<S> <C> <C>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
</TABLE>
Each series may also calculate the tax equivalent yield over a 30-day
period. The tax equivalent yield will be determined by first computing the yield
as discussed above. The series will then determine what portion of that yield is
attributable to securities, the income on which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus the state
tax rate times one minus the federal tax rate and
B-46
<PAGE>
then added to the portion of the yield that is attributable to other securities.
For the 30 days ended August 31, 1995, the tax equivalent yield (assuming a
federal tax rate of 36%) and the tax equivalent yield without the management
subsidies and waivers were as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
----------------------------------- ----------------------------------- -----------------------------------
Tax Equivalent Tax Equivalent Tax Equivalent
Tax Equivalent Yield Subsidy/ Tax Equivalent Yield Subsidy/ Tax Equivalent Yield Subsidy/
Series Yield Waiver Adjusted Yield Waiver Adjusted Yield Waiver Adjusted
- -------------- ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Florida....... 8.7% 7.1% 8.3% 6.7% 7.9% 6.4%
Hawaii
Income....... 9.0 8.9 8.6 8.5 8.2 8.0
Maryland...... 6.2 6.1 5.7 5.7 5.3 5.2
Massachusetts... 8.2 8.1 7.7 7.7 7.3 7.2
Michigan...... 7.6 7.5 7.2 7.1 6.8 6.7
New Jersey.... 8.4 8.1 8.0 7.7 7.6 7.3
New York...... 8.2 8.1 7.8 7.7 7.3 7.3
North
Carolina..... 7.9 7.8 7.5 7.4 7.1 7.0
Ohio.......... 7.7 7.7 7.3 7.2 6.9 6.8
Pennsylvania... 7.7 7.6 7.3 7.2 6.9 6.8
</TABLE>
Average Annual Total Return. Each series of the Fund may from time to time
advertise its average annual total return. Average annual total return is
determined separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus of each applicable series.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return and subsidy/waiver adjusted average annual
total return for the currently existing series (other than the money market
series) for the periods ended August 31, 1995 were as follows:
<TABLE>
<CAPTION>
Class B
---------------------------------------
Class A Subsidy/Waiver
------------------------------------------------------------- Adjusted
Subsidy/Waiver ------
Adjusted Ten
----------------------------- Years
One Five From One Five From One Five or From One
Series Year Years Inception Year Years Inception Year Years Inception Year
- --------------- ------ ------ ----------- ------ ------ ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida........ 4.6% N/A 7.5% 4.2% N/A 7.0% 2.4% N/A 3.1% 2.0%
Hawaii Income.. N/A N/A 6.1 N/A N/A 4.6 N/A N/A 4.0 N/A
Maryland....... 3.1 6.8% 6.3 3.1 6.8% 6.3 0.9 6.9% 7.2 0.9
Massachusetts... 5.1 7.9 7.3 5.1 7.9 7.3 2.9 8.0 8.1 2.9
Michigan....... 4.0 7.5 7.0 4.0 7.5 7.0 1.6 7.6 8.6 1.6
New Jersey..... 4.3 7.8 7.5 4.0 7.6 7.2 2.1 7.9 8.0 1.8
New York....... 4.5 7.9 7.4 4.5 7.9 7.4 2.3 8.0 8.6 2.3
North
Carolina...... 3.7 7.1 6.7 3.7 7.1 6.7 1.4 7.2 7.6 1.4
Ohio........... 4.4 7.7 7.3 4.4 7.7 7.3 2.2 7.8 8.3 2.2
Pennsylvania... 4.1 7.8 7.2 4.1 7.8 7.1 2.0 7.8 7.0 2.0
<CAPTION>
Class C
-----------------------------------------------
Subsidy/
Waiver
Ten Adjusted
Years ----------------------
Five or From One From One From
Series Years Inception Year Inception Year Inception
- --------------- -------- ------------ ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Florida........ N/A 1.0% 6.1% 3.7% 5.7% 3.5%
Hawaii Income.. N/A 2.5 N/A 7.8 N/A 6.2%
Maryland....... 6.9% 7.1 4.6 5.3 4.6 5.3%
Massachusetts.. 8.0 8.0 6.6 6.9 6.6 6.9%
Michigan....... 7.6 8.6 5.3 5.9 5.3 5.9%
New Jersey..... 7.6 7.8 5.9 6.5 5.7 6.3%
New York....... 8.0 8.6 6.0 6.5 6.0 6.5%
North
Carolina...... 7.2 7.5 5.1 5.7 5.1 5.7%
Ohio........... 7.8 8.3 5.9 6.5 5.9 6.5%
Pennsylvania... 7.8 7.0 5.7 6.3 5.7 6.3%
</TABLE>
Aggregate Total Return. Each series of the Fund may also advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B and Class C shares. See "How the Fund Calculates Performance"
in the Prospectus of each applicable series.
B-47
<PAGE>
Aggregate total return represents the cumulative change in the value of an
investment in a series of the Fund and is computed according to the following
formula:
ERV-P
------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods of a hypothetical $1,000 payment made at the beginning
of the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for each series for the one year, five year and
ten year (or since inception) periods ended August 31, 1995 for the Class A,
Class B and Class C shares of each currently existing series were as follows:
<TABLE>
<CAPTION>
Class B
------------------------------------------
Class A Class C
------------------------------------------ -----------------
Aggregate Total
Aggregate Total Return Aggregate Total
Return ------------------------- Return
------------------------- 10 yr. or -----------------
Since Since Since
Series 1 yr. 5 yr. Inception Inception Date 1 yr. 5 yr. Inception Inception Date 1 yr. Inception
- -------------------- ----- ----- --------- -------------- ----- ----- --------- -------------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida............. 7.9% N/A 44.8% 12/27/90 7.4% N/A 7.3 % 8/1/94 7.1% 7.8%
Hawaii Income....... N/A N/A 9.4 9/19/94 N/A N/A 9.0 9/19/94 N/A 8.8
Maryland............ 6.3 43.0% 45.4 1/22/90 5.9 40.3 108.3 1/22/85 5.6 5.7
Massachusetts....... 8.3 50.9 53.0 1/22/90 7.9 47.7 135.0 9/19/84 7.6 7.5
Michigan............ 7.2 48.1 50.8 1/22/90 6.6 45.0 147.4 9/19/84 6.3 6.4
New Jersey.......... 7.6 50.3 54.4 1/22/90 7.1 47.4 78.2 3/1/88 6.9 7.0
New York............ 7.7 51.0 54.1 1/22/90 7.3 48.0 145.6 9/27/84 7.0 7.1
North Carolina...... 6.9 45.1 48.1 1/22/90 6.4 42.2 116.9 2/13/85 6.2 6.2
Ohio................ 7.6 49.0 52.9 1/22/90 7.2 46.2 139.6 9/19/84 6.9 7.1
Pennsylvania........ 7.4 49.0 51.9 1/22/90 6.9 46.8 76.7 3/6/87 6.7 6.8
<CAPTION>
Series Inception Date
- -------------------- --------------
<S> <C>
Florida............. 8/1/94
Hawaii Income....... 9/19/94
Maryland............ 8/1/94
Massachusetts....... 8/1/94
Michigan............ 8/1/94
New Jersey.......... 8/1/94
New York............ 8/1/94
North Carolina...... 8/1/94
Ohio................ 8/1/94
Pennsylvania........ 8/1/94
</TABLE>
THE CONNECTICUT MONEY MARKET SERIES, THE MASSACHUSETTS MONEY MARKET SERIES,
THE NEW JERSEY MONEY MARKET SERIES AND THE NEW YORK MONEY MARKET SERIES
The money market series will prepare a current quotation of yield from time
to time. The yield quoted will be the simple annualized yield for an identified
seven calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the shares but excluding any capital
changes. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the money market series' portfolio and its
operating expenses. The money market series may also prepare an effective annual
yield computed by compounding the unannualized seven-day period return as
follows: by adding 1 to the unannualized seven-day period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
The money market series may also calculate the tax equivalent yield over a
7-day period. The tax equivalent yield will be determined by first computing the
current yield as discussed above. The Series will then determine what portion of
that yield is attributable to securities, the income on which is exempt for
federal income tax purposes. This portion of the yield will then be divided by
one minus the state tax rate times one minus the federal tax rate and then added
to the portion of the yield that is attributable to other securities. The
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series and New York Money Market Series' 7-day tax equivalent yield
(assuming a federal tax rate of 36%) as of August 31, 1995 was 5.5%, 5.9%, 5.2%
and 5.1%, respectively.
B-48
<PAGE>
Comparative performance information may be used from time to time in
advertising or marketing the money market series' shares, including data from
Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report or other
industry publications.
The money market series' yield fluctuates, and an annualized yield quotation
is not a representation by the money market series as to what an investment in
the money market series will actually yield for any given period. Actual yields
will depend upon not only changes in interest rates generally during the period
in which the investment in the money market series is held, but also on any
realized or unrealized gains and losses and changes in the money market series'
expenses.
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
A Look At Performance Over the Long-Term
<S> <C> <C> <C>
(1926-1992)
Common Stocks Long-Term Government Bonds Inflation
Average Annual Return 10.3% 4.8% 3.1%
</TABLE>
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
All of the Fund's net investment income is declared as a dividend each
business day. Shares will begin earning dividends on the day following the date
on which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn dividends until they are redeemed.
Unless the shareholder elects (by notice to the Dividend Disbursing Agent by the
first business day of the month) to receive monthly cash payments of dividends,
such dividends will be automatically received in additional series shares
monthly at net asset value on the payable date. In the event an investor redeems
all the shares in his or her account at any time during the month, all dividends
declared to the date of redemption will be paid to him or her at the time of the
redemption. The Fund's net investment income on weekends, holidays and other
days on which the Fund is closed for business will be declared as a dividend on
shares outstanding on the close of the last business day on which the Fund was
open for business. Accordingly, a shareholder who redeems his or her shares
effective as of 4:15 P.M. (4:30 P.M. for the money market series), New York
time, on a Friday earns a dividend which reflects the income earned by the Fund
on the following Saturday and Sunday. On the other
B-49
<PAGE>
hand, an investor whose purchase order is effective as of 4:15 P.M. (4:30 P.M.
for the money market series), New York time, on a Friday does not begin earning
dividends until the following business day. Net investment income consists of
interest income accrued on portfolio securities less all expenses, calculated
daily.
Net realized capital gains, if any, will be distributed annually and, unless
the shareholder elects to receive them in cash, will be automatically received
in additional shares of a series.
The per share dividends on Class B shares and Class C shares of a series
will be lower than the per share dividends on Class A shares of the series as a
result of the higher distribution-related fee applicable to the Class B and
Class C shares. The per share distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B and Class C shares. See "Net
Asset Value."
Annually, the Fund will mail to shareholders information regarding the tax
status of dividends and distributions made by the Fund in the calendar year. The
Fund intends to report the proportion of all distributions that were tax-exempt
for that calendar year. The percentage of income designated as tax-exempt for
the calendar year may be substantially different from the percentage of the
Fund's income that was tax-exempt for a particular period.
Federal Taxation
Under the Internal Revenue Code, each series of the Fund is required to be
treated as a separate entity for federal income tax purposes.
Each series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under the requirements
of Subchapter M of the Internal Revenue Code for each taxable year. If so
qualified, each series will not be subject to federal income taxes on any net
investment income and capital gains, if any, realized during the taxable year
which are distributed to shareholders, provided that it distributes at least 90%
of its net investment income and short-term capital gains and 90% of any excess
of its tax-exempt interest over certain disallowed deductions during the taxable
year. In addition, each series intends to make distributions in accordance with
the provisions of the Internal Revenue Code so as to avoid the 4% excise tax on
certain amounts remaining undistributed at the end of each calendar year. In
order to qualify as a regulated investment company, each series of the Fund
must, among other things, (a) derive at least 90% of its gross income (without
offset for losses) from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities; (b)
derive less than 30% of its gross income (without offset for losses) from the
sale or other disposition of stock, securities or futures contracts or options
thereon held for less than three months; and (c) diversify its holdings so that,
at the end of each quarter of the taxable year (i) at least 50% or more of the
market value of the assets of the series is represented by cash, U.S. Government
securities and other securities limited, in respect of any one issuer, to an
amount not greater than 5% of the market value of the assets of the series and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of the assets of the series is invested in the securities of
any one issuer (other than U.S. Government securities).
Gain or loss realized by a series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount". Market discount generally is the
difference, if any, between the price paid by the series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by a series at
its original issue.
The purchase of a put option may be subject to the short sale rules or
straddle rules (including the modified short sale rule) for federal income tax
purposes. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such put option (or any other Section
1256 contract under the Internal Revenue Code) will be treated as 60% long-term
and 40% short-term capital gain or loss. On the last trading day of the fiscal
year of a series, all outstanding put options as well as certain futures
contracts will be treated as if such positions were closed out at their closing
price on such day, with any resulting gain or loss recognized as 60% long-term
and 40% short-term capital gain or loss. In addition, positions held by a series
which consist of at least one debt security and at least one put option which
substantially reduces the risk of loss of the series
B-50
<PAGE>
with respect to that debt security constitute a "mixed straddle" which is
governed by certain provisions of the Internal Revenue Code that may cause
deferral of losses, adjustments in the holding periods of debt securities and
conversion of short-term capital losses into long-term capital losses. Each
series may consider making certain tax elections applicable to mixed straddles.
Each series' hedging activities may be affected by the requirement under the
Internal Revenue Code that less than 30% of a series' income be derived from the
sale or other disposition of securities, futures contracts, options and other
instruments held for less than three months. From time to time, this requirement
may cause a series to limit its acquisitions of futures contracts to those that
will not expire for at least three months. At the present time, there is only a
limited market for futures contracts on the municipal bond index that will not
expire within three months. Therefore, to meet the 30%/3 month requirement, a
series may choose to use futures contracts based on fixed-income securities that
will not expire within three months.
Since each series is treated as a separate entity for federal income tax
purposes, the determination of the amount of net capital gains, the
identification of those gains as long-term or short-term and the determination
of the amount of income dividends of a particular series will be based on the
purchases and sales of securities and the income received and expenses incurred
in that series. Net capital gains of a series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the series.
For the year ended August 31, 1995, the following series had capital loss
carryforwards for federal tax purposes as follows:
<TABLE>
<CAPTION>
Capital Loss
Series Carryforward Expires
- -------------------------------------------------------------------- ------------- ---------
<S> <C> <C>
Florida............................................................. $ 2,726,000 2003
New Jersey.......................................................... $ 1,683,700 2003
New York............................................................ $ 15,700 1999
$ 1,026,100 2003
Pennsylvania........................................................ $ 1,452,100 2003
</TABLE>
If any net long-term capital gains in excess of net short-term capital
losses are retained by a series for investment, requiring federal income taxes
to be paid thereon by the series, the series will elect to treat such capital
gains as having been distributed to shareholders. As a result, shareholders will
be taxed on such amounts as long-term capital gains, will be able to claim their
proportionate share of the federal income taxes paid by the series on such gains
as a credit against their own federal income tax liabilities, and will be
entitled to increase the adjusted tax basis of their shares in such series by
the differences between their PRO RATA share of such gains and their tax credit.
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any series of the
Fund for the taxable year are not subject to federal income tax (except for
possible application of the alternative minimum tax). Interest from certain
private activity and other bonds is treated as an item of tax preference for
purposes of the 28% alternative minimum tax on individuals and the 20%
alternative minimum tax on corporations. To the extent interest on such bonds is
distributed to shareholders of any series of the Fund, shareholders will be
subject to the alternative minimum tax on such distributions. Moreover,
exempt-interest dividends, whether or not on private activity bonds, that are
held by corporations will be taken into account (i) in determining the
alternative minimum tax imposed on 75% of the excess of adjusted current
earnings over alternative minimum taxable income, (ii) in calculating the
environmental tax equal to 0.12 percent of a corporation's modified alternative
minimum taxable income in excess of $2 million, and (iii) in determining the
foreign branch profits tax imposed on the effectively connected earnings and
profits (with adjustments) of United States branches of foreign corporations
B-51
<PAGE>
Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of the series have been held
by such shareholders. Such distributions are not eligible for the dividends
received deduction. Distributions of long-term capital gains of the series are
includable in income and may also be subject to the alternative minimum tax.
Any short-term capital loss realized upon redemption of shares within six
months (or such shorter period as may be established by Treasury regulations)
from the date of purchase of such shares and following receipt of an
exempt-interest dividend will be disallowed to the extent of such tax-exempt
dividend. Any loss realized upon the redemption of shares within six months from
the date of purchase of such shares and following receipt of a long-term capital
gains distribution will be treated as long-term capital loss to the extent of
such long-term capital gains distribution and to the extent not disallowed under
the preceding sentence.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Interest on indebtedness incurred by shareholders to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes. In
addition, under rules used by the Internal Revenue Service for determining when
borrowed funds are considered to be used for the purpose of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares.
Persons holding certain municipal obligations who also are "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by bonds in the
portfolios of the Fund's series has been made by the Fund. Potential investors
should consult their tax advisers with respect to this matter before purchasing
shares of the Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. Such proposals, if enacted,
may further limit the availability of state or municipal obligations for
investment by the Fund and the value of portfolio securities held by the series
may be adversely affected. In such case, each series of the Fund would
reevaluate its investment objective and policies.
All distributions of taxable net investment income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the applicable series of the Fund on the reinvestment date.
Distributions of tax-exempt interest must also be reported. Under federal income
tax law, each series of the Fund will be required to report to the Internal
Revenue Service all distributions of taxable income and capital gains as well as
gross proceeds from the redemption or exchange of shares of such series, except
in the case of certain exempt shareholders. Under the backup withholding
provisions of the Internal Revenue Code, all proceeds from the redemption or
exchange of shares are subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the appropriate
series of the Fund with their taxpayer identification numbers on IRS Form W-9
and with required certifications regarding their status under the federal income
tax law. Such withholding is also required on taxable dividends and
B-52
<PAGE>
capital gains distributions unless it is reasonably expected that at least 95%
of the distributions of the series are comprised of tax-exempt interest. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Investors may wish to consult their tax advisers about
the applicability of the backup withholding provisions.
State Taxation
The following discussion assumes that each series of the Fund qualified for
each taxable year as a regulated investment company for federal tax purposes.
CONNECTICUT. Distributions from the Connecticut Money Market Series (the
Connecticut Series) to individual shareholders of the Connecticut Series
resident in Connecticut and Connecticut resident trusts and estates are not
subject to taxation pursuant to the Connecticut Personal Income Tax to the
extent that such distributions constitute exempt-interest dividends under
section 852(b)(5) of the Internal Revenue Code and are derived from income
received by the Connecticut Series as interest from obligations of the State of
Connecticut or its political subdivisions (Connecticut Municipal Obligations) or
on obligations the interest on which is exempt from state taxation under the
laws of the United States (including obligations issued by Puerto Rico, the
Virgin Islands and Guam). It is likely that capital gain dividends derived from
the sale of Connecticut Municipal Obligations also are not subject to the
Connecticut Personal Income Tax. Other distributions to individual shareholders
resident in Connecticut and to resident trusts and estates from the Connecticut
Series, including capital gains dividends derived from sales of obligations
other than Connecticut Municipal Obligations, exempt-interest dividends derived
from sources other than Connecticut Obligations, and distributions that are
taxable as dividends for federal income tax purposes are not exempt from the
Connecticut Personal Income Tax. Individual shareholders and estates and trusts
subject to alternative minimum tax for federal tax purposes may also be subject
to alternative minimum tax for Connecticut Tax purposes. Exempt interest-
dividends other than those derived from Connecticut Obligations and any loss
from the sale or exchange of Connecticut Obligations will be added to the
alternative minimum tax base, while exempt dividends paid by a regulated
investment company, exempt interest-dividends derived from interest payments on
Connecticut Obligations and capital gain dividends derived from the sale of
Connecticut obligations are subtracted from the alternative minimum tax base for
Connecticut Tax purposes.
Distributions that constitute exempt-interest dividends under section
852(b)(5) of the Internal Revenue Code from the Connecticut Series to corporate
shareholders (other than shareholders that are S Corporations) that are
apportioned to Connecticut are subject to taxation pursuant to the Connecticut
Corporation Business Tax, whether or not derived from Connecticut Municipal
Obligations. Distributions to corporate shareholders (other than shareholders
that are S Corporations) from the Connecticut Series that constitute capital
gains for federal income tax purposes are also subject to taxation pursuant to
the Connecticut Corporation Business Tax. Thirty percent of distributions to
corporate shareholders (other than shareholders that are S Corporations) that
are taxable as dividends for federal income tax purposes generally is subject to
taxation pursuant to the Corporation Business Tax and the remaining seventy
percent is not.
Distributions to shareholders of the Connecticut Series that are S
Corporations that constitute either exempt-interest dividends, whether or not
derived from Connecticut Municipal Obligations, capital gain dividends or
taxable dividends for federal income tax purposes which are required to be
separately taken into account by shareholders of S Corporations for federal
income tax purposes are not subject to taxation pursuant to the Connecticut
Corporation Business Tax. For purposes of the Connecticut Personal Income Tax,
Connecticut resident individual, trust and estate shareholders of S Corporations
are taxed on their PRO RATA share of such separately stated items in the same
manner and to the same extent as if received by them directly from the
Connecticut Series.
Shares of the Connecticut Series will not be subject to the personal
property tax in the State of Connecticut.
B-53
<PAGE>
Shareholders of the Connecticut Series should consult their tax advisers
about other state and local tax consequences of their investment in the
Connecticut Series including the tax consequences of ceasing to be a resident of
Connecticut.
FLORIDA. Florida does not impose an income tax on individuals. Thus,
individual shareholders of the Florida Series will not be subject to any Florida
state or local income taxes on distributions received from the Florida Series.
Florida does impose a State income tax on the income of corporations,
limited liability companies and certain trusts (excluding probate and
testamentary trusts) that is allocated or apportioned to Florida. For those
shareholders, in determining income subject to Florida corporate income tax,
Florida generally "piggy-backs" federal taxable income concepts, subject to
adjustments that are applicable to all corporations and some adjustments that
are applicable to certain classes of corporations. In regard to the Florida
Series, the most significant adjustment is for interest income from state and
local bonds that is exempt from tax under Section 103 of the Internal Revenue
Code. Provided that the Florida Series qualifies as a regulated investment
company and complies with the requirements of the Internal Revenue Code
necessary to pay exempt-interest dividends, including the requirement that at
least 50% of the value of its assets at the close of each quarter of its taxable
year be invested in state, municipal or other obligations the interest on which
is exempt from tax under Section 103, the corporate shareholders of the Series
may incur Section 103 interest income from Florida Series distributions. While
Section 103 interest income is generally excluded from taxable income for
federal income tax purposes, it is added back to taxable income for Florida
corporate income tax purposes (only 40% of such income is added back for
corporate taxpayers subject to Florida alternative minimum tax). Consequently,
the portion of the Section 103 interest income (or 40% of that amount for
corporate taxpayers subject to the Florida alternative minimum tax) allocated or
apportioned to Florida of a corporate Florida Series shareholder arising from
Florida Series distributions is subject to Florida corporate income taxes. Other
distributions from the Florida Series to corporate shareholders, to the extent
allocated or apportioned to Florida, may also be subject to Florida income tax.
Provided that on and throughout January 1 of a given year the portfolio of
assets of the Florida Series will be comprised exclusively of notes, bonds, and
other obligations issued by the State of Florida or its municipalities, counties
and other taxing districts, the United States Government and its agencies,
Puerto Rico, Guam and the Virgin Islands, and other investments exempt from
Florida intangible personal property tax, in the opinion of Florida counsel
shares of the Florida Series will not be subject to Florida intangible personal
property taxes for that year. The Florida Series has obtained a technical
assistance advisement from the Florida Department of Revenue which confirms this
consequence. If the Florida Series holds any other type of asset on that date,
then the entire value of the Florida Series shares (except for that portion of
the value attributable to U.S. government obligations) will be subject to the
intangible personal property tax.
Shareholders of the Florida Series should consult their tax advisers about
other state and local tax consequences of their investments in the Florida
Series.
HAWAII. In the opinion of Hawaii tax counsel, distributions from the Hawaii
Series to Hawaii residents will not be subject to Hawaii income tax to the
extent that such distributions constitute exempt interest dividends under
Section 852(b)(5) of the Internal Revenue Code and are derived from income
received by the Series from obligations which pay interest excludable from
Hawaii income tax under Hawaii law. Other distributions, including capital gains
distributions, exempt interest dividends derived from obligations of states
other than Hawaii and their political subdivisions, and distributions that are
taxable as dividends for federal income tax purposes are not exempt from Hawaii
income tax.
Distributions from the Hawaii Series are not exempt from the Hawaii
Franchise Tax. This tax applies to banks, building and loan associations,
financial services loan companies, financial corporations, and small business
investment companies.
Persons or entities who are not Hawaii residents should generally not be
subject to Hawaiian income taxation on dividends and distributions made by the
Series but may be subject to other state and local taxes.
B-54
<PAGE>
MARYLAND. In the opinion of Maryland tax counsel, individual shareholders
of the Maryland Series resident in Maryland, corporate shareholders (other than
financial institutions such as banks) of the Maryland Series and shareholders of
the Maryland Series that are trusts or estates will not be subject to Maryland
State or local income taxes on distributions received from the Maryland Series
to the extent that such distributions are attributable to interest on tax-exempt
obligations of the State of Maryland or its political subdivisions and
authorities, or obligations issued by the Governments of Puerto Rico, the Virgin
Islands and Guam, provided that the Maryland Series qualifies as a regulated
investment company and complies with the requirements of the Internal Revenue
Code necessary to pay exempt-interest dividends including the requirement that
at least 50% of the value of its assets at the close of each quarter of its
taxable year be invested in state, municipal or other obligations, the interest
on which is exempt from federal income tax under Section 103(a) of the Internal
Revenue Code. Up to 50 percent of dividends attributable to exempt-interest
income received by the Maryland Series from obligations that are "specified
private activity bonds" within the meaning of Section 57(a)(5)(C) of the
Internal Revenue Code could be subject to Maryland individual income tax.
In addition, distributions received from the Maryland Series which are
attributable to (i) gains realized on the sale or exchange of bonds issued by
the State of Maryland or its political subdivisions and (ii) interest received
by the Maryland Series on U.S. Government obligations will not be subject to
Maryland State and local income taxes. Other distributions from the Maryland
Series will generally not be exempt from Maryland State and local income taxes.
Entities subject to the Maryland financial institution franchise tax will
generally be subject to tax on all distributions from the Maryland Series.
Shares of the Maryland Series will not be subject to the Maryland personal
property tax.
Shareholders of the Maryland Series should consult their tax advisers about
other state and local tax consequences of their investments in the Maryland
Series.
MASSACHUSETTS. In the opinion of Massachusetts tax counsel, if the
Massachusetts Series and the Massachusetts Money Market Series each qualify as
regulated investment companies, (1) individual and other noncorporate
shareholders of each Series resident in Massachusetts will not be subject to
Massachusetts personal income tax on distributions received from such Series to
the extent such distributions are attributable to interest on tax-exempt
obligations of the Commonwealth of Massachusetts and its political subdivisions
and instrumentalities provided that such Series complies with the requirement
that at least 50% of the value of its assets at the close of each quarter of its
taxable year be invested in state, municipal or other obligations, the interest
on which is excluded from gross income for federal income tax purposes under
Section 103(a) of the Internal Revenue Code; (2) such shareholders will not be
subject to Massachusetts personal income tax on distributions received from
either of such Series to the extent such distributions are attributable to
interest on obligations issued by the Governments of Puerto Rico, the Virgin
Islands or Guam; and (3) such shareholders will not be subject to Massachusetts
personal income tax on capital gain dividends received from either of such
Series to the extent such capital gain dividends are attributable to long-term
capital gains realized on the sale or exchange of Massachusetts obligations
issued pursuant to legislation which specifically exempts capital gains from the
disposition of such obligations from Massachusetts personal income tax; in each
case subject to the requirement that such Series notify its shareholders in
writing within sixty days following the close of its taxable year of the portion
of any distribution qualifying for any such exemption.
Other distributions from the Massachusetts Series and the Massachusetts
Money Market Series will generally not be exempt from Massachusetts personal
income tax.
Massachusetts Series and the Massachusetts Money Market Series distributions
will not be excluded from net income of corporations and shares of the
Massachusetts Series and the Massachusetts Money Market Series will not be
excluded from the net worth of intangible property corporations in determining
the Massachusetts excise tax on corporations.
Shares of the Massachusetts Series and the Massachusetts Money Market Series
will not be subject to Massachusetts local property taxes.
B-55
<PAGE>
Shareholders of the Massachusetts Series and the Massachusetts Money Market
Series should consult their tax advisers about other state and local tax
consequences of their investments in the Massachusetts Series and the
Massachusetts Money Market Series.
MICHIGAN. Individual shareholders of the Michigan Series residing in
Michigan will not be subject to Michigan personal income tax or personal income
taxes imposed by cities in Michigan, and corporate shareholders will not be
subject to the Michigan single business tax, on distributions received from the
Michigan Series to the extent such distributions are attributable to interest on
tax-exempt obligations of the State of Michigan or any municipality, political
subdivision or governmental agency or instrumentality thereof or on obligations
issued by the Governments of Puerto Rico, the Virgin Islands and Guam, provided
that the Michigan Series complies with the requirement of the Internal Revenue
Code that at least 50% of the value of its assets at the close of each quarter
of its taxable year is invested in state, municipal or other obligations the
interest on which is exempt from federal income tax under Section 103(a) of the
Internal Revenue Code.
Other distributions from the Michigan Series, including those related to
long-term and short-term capital gains, will generally not be exempt from the
Michigan personal income tax or single business tax.
Income from the Michigan Series, to the extent attributable to interest on
obligations issued by Michigan or its political subdivisions, will be excluded
for purposes of determining yield under the Michigan intangibles tax.
The Fund has obtained rulings from the Michigan Department of Treasury which
confirm these state tax consequences for Michigan resident individuals and
corporations. Shareholders of the Michigan Series should consult their tax
advisers about other state and local tax consequences of their investments in
the Michigan Series.
NEW JERSEY. In the opinion of New Jersey tax counsel, individual
shareholders of the New Jersey Series and the New Jersey Money Market Series
resident in New Jersey and shareholders of the New Jersey Series and the New
Jersey Money Market Series that are trusts or estates will not be subject to New
Jersey income tax on distributions received from either series to the extent
that such distributions are attributable to interest on tax-exempt obligations
of the State of New Jersey or its political subdivisions and authorities, or
obligations issued by the Governments of Puerto Rico, the Virgin Islands and
Guam, provided that the relevant Series complies with the requirement of the New
Jersey Gross Income Tax Act that (1) 80% of the aggregate principal amount of
all its investments (excluding cash, cash items and receivables, and financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto that are related to such series' business of
investing in securities (Related Financial Instruments)) are invested in
obligations issued by the State of New Jersey or any of its agencies or
political subdivisions, or other obligations exempt from state or local taxation
under the laws of New Jersey and the United States and (2) it has no investments
other than interest bearing obligations, obligations issued at a discount, and
cash and cash items, including receivables, and Related Financial Instruments.
Distributions received by shareholders who are resident individuals, trusts
or estates from the New Jersey Series and the New Jersey Money Market Series
which are attributable to gains realized on the sale or exchange of bonds issued
by the State of New Jersey or its political subdivisions are exempt from New
Jersey income tax. Other distributions from the New Jersey Series and the New
Jersey Money Market Series, including those related to long-term and short-term
capital gains from other bonds, will generally not be exempt from New Jersey
income tax.
Shareholders of the New Jersey Series and the New Jersey Money Market Series
should consult their tax advisers about other state and local tax consequences
of their investments in these Series.
NEW YORK. The New York State franchise tax law and the New York City
general corporation tax law have special provisions governing the taxation of
regulated investment companies which elect to be treated and qualify as such
under Subchapter M of the Internal Revenue Code. Assuming that (1) the New York
Series and the New York Money Market Series (the Series) each are treated as a
separate entity for federal income and New York purposes, (2) each such Series
qualifies as a regulated investment company and distributes all of its
B-56
<PAGE>
investment income and short-term and long-term capital gains so as to have no
federal income tax liability, and (3) all of the assets of each Series consist
of New York Obligations (as described below), other governmental obligations,
cash or certain cash equivalents, in the opinion of New York tax counsel, each
Series will be exempt from the New York State franchise tax and the New York
City general corporation tax, except for nominal taxes of $325 (increased by the
applicable New York State surcharge) and $300, respectively. However, capital
gains retained by a Series could be subject to New York State or City tax, and
shareholders of such Series who are State or City residents will receive no
State or City income tax credit for taxes paid by such Series.
Individual shareholders of the New York Series, the New York Money Market
Series and the New York Income Series resident in New York State will not be
subject to State income tax on distributions received from either Series to the
extent such distributions are attributable to interest on tax-exempt obligations
of the State of New York and its political subdivisions, and obligations of the
Governments of Puerto Rico, the Virgin Islands and Guam (New York Obligations),
provided that the relevant Series qualifies as a regulated investment company
and satisfies the requirements of the Internal Revenue Code necessary to pay
exempt-interest dividends, including the requirement that at least 50% of the
value of its assets at the close of each quarter of its taxable year be invested
in state, municipal or other obligations the interest on which is excluded from
gross income for federal income tax purposes under Section 103(a) of the
Internal Revenue Code. Individual shareholders who reside in New York City will
be able to exclude such distributions for City income tax purposes.
Other distributions from the New York Series, the New York Money Market
Series and the New York Income Series, including those related to long-term and
short-term capital gains, will generally not be exempt from State or City income
tax.
Distributions from these Series will not be excluded from net income and
shares of these Series will not be excluded from investment capital in
determining State or City franchise and corporation taxes for corporate
shareholders.
Shares of these Series will not be subject to any State or City property
tax.
The Fund has obtained the opinion of its New York tax counsel to confirm
these State and City tax consequences for the New York Series and the New York
Money Market Series and for New York resident individuals and corporations who
are shareholders of the New York Series and the New York Money Market Series.
The Fund anticipates receiving an opinion of its New York tax counsel to confirm
these State and City tax consequences for the New York Income Series and for New
York residents who are shareholders of that series when such series is offered.
Shareholders of the New York Series, the New York Money Market Series and the
New York Income Series should consult their advisers about other state and local
tax consequences of their investments in these Series.
NORTH CAROLINA. In the opinion of North Carolina tax counsel, individual
shareholders resident in North Carolina and shareholders that are trusts or
estates will not be subject to North Carolina income tax on distributions
received from the North Carolina Series to the extent such distributions are
either (i) exempt from federal income tax and attributable to interest on
obligations of North Carolina or its political subdivisions; nonprofit
educational institutions organized or chartered under the laws of North
Carolina; or Guam, Puerto Rico or the Virgin Islands including the governments
thereof and their agencies, instrumentalities and authorities or (ii)
attributable to interest on direct obligations of the United States. These North
Carolina income tax exemptions will be available only if the North Carolina
Series complies with the requirement of the Internal Revenue Code that at least
50% of the value of its assets at the close of each quarter of its taxable year
is invested in state, municipal or other obligations the interest on which is
exempt from federal income tax under Section 103(a) of the Internal Revenue
Code.
Other distributions from the North Carolina Series (except distributions of
capital gains attributable to the sale by the North Carolina Series of an
obligation the profit from which is exempt by a North Carolina statute) will
generally not be exempt from North Carolina income tax.
Shares of the North Carolina Series will not be subject to an intangibles
tax in North Carolina.
B-57
<PAGE>
The Series has obtained a ruling signed by the Director of and an
Information Release issued by the Individual Income Tax Division of the North
Carolina Department of Revenue which form the basis of the opinion of North
Carolina tax counsel regarding the North Carolina income tax consequences of
investments in the North Carolina Series for individuals, trusts and estates.
The general practice in North Carolina is for taxpayers to rely on rulings
signed by a Division Director and Information Releases issued by a Division.
Shareholders of the North Carolina Series should consult their tax advisers
about other state and local tax consequences of their investments in the North
Carolina Series.
OHIO. In the opinion of Ohio tax counsel, distributions with respect to
shares of the Ohio Series ("Distributions") that are properly attributable to
interest on, or profit made on the sale, exchange, or other disposition of, Ohio
Obligations are exempt from the Ohio personal income tax and municipal and
school district income taxes in Ohio, provided that the Ohio Series continues to
qualify as a regulated investment company for federal income tax purposes and
that at all times at least 50% of the value of the total assets of the Ohio
Series consists of Ohio Obligations, or similar obligations of other states or
their subdivisions (but not including, for this purpose, obligations of United
States territories or possessions). For purposes of this discussion of Ohio
taxes, (i) "Ohio Obligations" means obligations issued by or on behalf of the
State of Ohio, political subdivisions thereof and agencies and instrumentalities
of the State or its political subdivisions and (ii) it is assumed that the
regulated investment company and 50% requirements described above are satisfied.
Distributions are excluded from the net income base of the Ohio corporation
franchise tax to the extent that such Distributions are either excluded from
gross income for federal income tax purposes or are properly attributable to
interest on, or profit made on the sale, exchange or other disposition of, Ohio
Obligations. However, shares of the Ohio Series will be includable in the
computation of net worth for purposes of such tax.
Distributions that are properly attributable to interest on obligations of
the United States or its territories or possessions or of any authority,
commission or instrumentality of the United States that is exempt from state
income taxes under the laws of the United States (including the obligations of
the Governments of Puerto Rico, the Virgin Islands and Guam) are exempt from the
Ohio personal income tax and municipal and school district income taxes in Ohio,
and are excluded from the net income base of the Ohio corporation franchise tax.
Other Distributions will generally not be exempt from Ohio income tax.
Shareholders of the Ohio Series should consult their tax advisers about
other state and local tax consequences of their investments in the Ohio Series.
PENNSYLVANIA. Under Pennsylvania law, individual shareholders of the
Pennsylvania Series who are residents of Pennsylvania will not be subject to
Pennsylvania personal income tax on distributions received from the Pennsylvania
Series to the extent such distributions are attributable to interest on
tax-exempt obligations of the Commonwealth and its political subdivisions and
authorities or of the Governments of Puerto Rico, the Virgin Islands and Guam.
Other distributions from the Pennsylvania Series will generally not be exempt
from Pennsylvania personal income tax. Distributions paid by the Pennsylvania
Series will also be exempt from the Philadelphia School District investment net
income tax for individuals who are residents of the City of Philadelphia to the
extent such distributions are derived from interest on tax-exempt obligations of
the Commonwealth and its political subdivisions and authorities or of the
governments of Puerto Rico, the Virgin Islands and Guam, or to the extent such
distributions are designated as capital gain dividends for federal income tax
purposes.
Corporations which are subject to the Pennsylvania corporate net income tax
will not be subject to tax on distributions received from the Pennsylvania
Series provided that such distributions are not included in federal taxable
income determined before net operating loss deductions and special deductions.
The Pennsylvania Series will not be treated as a taxable entity and
therefore will not be subject to the Pennsylvania personal income tax or
corporate net income tax.
In addition, shares of the Pennsylvania Series will not be subject to
personal property taxation in Pennsylvania to the extent that the portfolio
securities owned by the Pennsylvania Series on the annual assessment date would
not be subject to such taxation if owned by a resident of Pennsylvania. Because
the Pennsylvania
B-58
<PAGE>
Series will invest predominantly in obligations of the Commonwealth and its
political subdivisions and authorities, which obligations are not subject to
personal property taxation in Pennsylvania, only a small fraction, if any, of
the value of the shares of the Pennsylvania Series would be subject to such tax.
Shareholders of the Pennsylvania Series should consult their tax advisers
about other state and local tax consequences of their investments in the
Pennsylvania Series.
ORGANIZATION AND CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 18, 1984, as amended. The Declaration of Trust and the
By-Laws of the Fund are designed to make the Fund similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability; under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the Fund, which is not the case with a
corporation. The Declaration of Trust of the Fund provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Fund and that every written obligation, contract, instrument or undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not individually bound thereunder.
Counsel for the Fund have advised the Fund that no personal liability will
attach to the shareholders under any undertaking containing such provision when
adequate notice of such provision is given, except possibly in a few
jurisdictions. With respect to all types of claims in the latter jurisdictions
and with respect to tort claims, contract claims where the provision referred to
is omitted from the undertaking, claims for taxes and certain statutory
liabilities in other jurisdictions, a shareholder may be held personally liable
to the extent that claims are not satisfied by the Fund. However, upon payment
of any such liability the shareholder will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the operations of the
Fund, with the advice of counsel, in such a way so as to avoid, as far as
possible, ultimate liability of the shareholders for liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as such liability may arise from his, her
or its own bad faith, willful misfeasance, gross negligence or reckless
disregard of his, her or its duties. It also provides that all third parties
shall look solely to the Fund property or the property of the appropriate series
of the Fund for satisfaction of claims arising in connection with the affairs of
the Fund or of the particular series of the Fund, respectively. With the
exceptions stated, the Declaration of Trust permits the Trustees to provide for
the indemnification of Trustees, officers, employees or agents of the Fund
against all liability in connection with the affairs of the Fund.
Other distinctions between a corporation and a Massachusetts business trust
include the absence of a requirement that business trusts issue share
certificates.
The Fund and all series thereof shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders or by the Trustees by written notice to the
shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in separate series. Each series
of the Fund, for federal income tax and Massachusetts state law purposes, will
constitute a separate trust which will be governed by the provisions of the
Declaration of Trust. All shares of any series of the Fund issued and
outstanding will be fully paid and non-assessable by the Fund. Each share of
each series represents an equal proportionate interest in that series with each
other share of that series. The assets of the Fund received for the issue or
sale of the shares of each series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors of such series, are specially
allocated to such series and constitute the underlying assets of such series.
The underlying assets of each series are segregated on the books of account and
are to be charged with the liabilities in respect to such series and with a
share of the general liabilities of the Fund. Under no circumstances would the
assets of a series be used to meet liabilities which are not otherwise properly
chargeable to it. Expenses with respect to any two or more series are to be
B-59
<PAGE>
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Fund, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series or which are general
or allocable to two or more series. Upon redemption of shares of a series of the
Fund, the shareholder will receive proceeds solely of the assets of such series.
In the event of the dissolution or liquidation of the Fund, the holders of the
shares of any series are entitled to receive as a class the underlying assets of
such series available for distribution to shareholders. On October 16, 1995,
shareholders of the Arizona, Georgia and Minnesota Series approved a plan of
reorganization whereby the assets of such series were to be acquired by
Prudential National Municipals Fund, Inc. in tax-free transactions, which
occurred on October 27, 1995.
Shares of the Fund entitle their holders to one vote per share. However, on
any matter submitted to a vote of the shareholders, all shares then entitled to
vote will be voted by individual series, unless otherwise required by the
Investment Company Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a series would be
voted upon only by shareholders of the series involved. Additionally, approval
of the investment advisory agreement is a matter to be determined separately by
each series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve the proposal as to those series.
The Fund does not intend to hold annual meetings of shareholders.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any series (which would be
used to distinguish among the rights of different categories of shareholders, as
might be required by future regulations or other unforeseen circumstances) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Fund for shares of any
additional series or class, and all assets in which such consideration is
invested, would belong to that series or class (subject only to the rights of
creditors of such series or class) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to removal upon the action of
two-thirds of the outstanding shares of beneficial interest) and appoint their
own successors, provided that always at least a majority of the Trustees have
been elected by the shareholders of the Fund. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains cash and certain financial and accounting
books and records pursuant to an agreement with the Fund. See "How the Fund is
Managed-- Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus of each series.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent of the Fund. Its
mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005. PMFS is
a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, in addition to a
new set up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to
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<PAGE>
postage, stationery, printing, allocable communication and other costs. For the
fiscal year ended August 31, 1995, the Fund incurred fees for the services of
PMFS in the following amounts with respect to each currently existing series:
<TABLE>
<CAPTION>
Transfer Agency
Series Fees
- ---------------------------------------------------- ----------------
<S> <C>
Connecticut Money Market............................ $ 31,000
Florida............................................. 41,700
Hawaii Income....................................... 2,500
Maryland............................................ 25,900
Massachusetts....................................... 24,500
Massachusetts Money Market.......................... 24,000
Michigan............................................ 39,000
New Jersey.......................................... 110,100
New Jersey Money Market............................. 82,000
New York............................................ 134,300
New York Money Market............................... 126,000
North Carolina...................................... 28,400
Ohio................................................ 53,100
Pennsylvania........................................ 129,000
</TABLE>
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
Moody's Investors Service
Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements may
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated within the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1 and Baa1.
Short-Term Ratings
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG 1 are of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing. Loans bearing the designation MIG 2 are of
high quality with margins of protection ample although not so large as in the
B-61
<PAGE>
preceding group. Loans bearing the designation MIG 3 are of favorable quality,
with all security elements accounted for but lacking the strength of the
preceding grades. Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
Short-Term Debt Ratings
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations having an original maturity not
exceeding one year.
Prime-1: Issuers rated at Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have
a strong ability for repayment of senior short-term debt obligations.
Standard & Poor's Ratings Group
Bond Ratings
AAA: Debt rated AAA has the highest rating assigned by S&P's. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher-rated categories.
Municipal Notes
An S&P municipal note rating reflects the liquidity concerns and market
access risks unique to municipal notes. Municipal notes due in 3 years or less
will likely receive a municipal note rating, while notes maturing beyond 3 years
will most likely receive a long-term debt rating.
SP-1: Very strong capacity to pay principal and interest. Those issues
determined to possess extremely strong safety characteristics are denoted with a
plus sign (+) designation.
SP-2: Satisfactory capacity to pay principal and interest.
Commercial Paper Ratings
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
B-62
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--101.0%
- ------------------------------------------------------------------------------------------------------------------------------
City of New Haven, Ser. 95 Aaa 5.00% 2/15/96 $ 1,250 $ 1,252,182
Connecticut St. Economic Recovery, Ser. A Aa 5.40 12/15/95 2,000 2,006,947
Connecticut St. Dev. Auth., Ctrl. Rev.,
Conco Proj. Ser. 85, F.R.W.D. P1 3.50 9/07/95 1,700 1,700,000
Jewish Cmnty. Ctr. of New Haven, Ser. 92, F.R.M.D. A-1* 3.90 9/01/95 650 650,000
Lt. & Pwr. Co. Proj., Ser. 93B, F.R.W.D. VMIG1 3.70 9/06/95 4,400 4,400,000
Rand Whitney Container Bd., Ser. 93, F.R.W.D. P1 3.15 9/06/95 1,000 1,000,000
SHW Inc. Proj., Ser. 90, F.R.W.D. NR 3.65 9/06/95 3,600 3,600,000
Water Facs. Rev. Bridgeport Hydrolic
Company Project., Ser. 95, F.R.W.D. P1 3.10 9/06/95 2,000 2,000,000
Connecticut St. Hlth. & Edl. Facs. Auth. Rev.,
Bridgeport Hospital, Series B, F.R.W.D. VMIG1 3.35 9/06/95 1,300 1,300,000
Charlotte-Hungerford Ser. B, F.R.W.D. VMIG1 3.70 9/07/95 1,200 1,200,000
Pomfret School Issue, Series A, F.R.W.D. VMIG1 3.50 9/06/95 1,000 1,000,000
Yale Univ., Ser. L, T.E.C.P. VMIG1 3.50 11/09/95 1,100 1,100,000
Yale Univ., Ser. N, T.E.C.P. VMIG1 3.50 11/09/95 1,500 1,500,000
Connecticut St. Hsg. Fin. Auth., Mtg. Fin. Prog. Ser.
93E-2, A.M.T. VMIG1 4.50 11/15/95 1,000 1,000,000
Connecticut St. Mun. Elec. Engy., Pwr. Supply
Sys. Rev., Ser. 95A, T.E.C.P. P1 3.55 12/08/95 1,600 1,600,000
Connecticut St. Spec. Assmt.,
Unemployment Comp. Ser. 93C, A.M.T. VMIG1 3.90 7/01/96 2,500 2,500,000
Unemployment Comp. Ser. 93B, F.R.W.D. VMIG1 3.60 9/06/95 3,500 3,500,000
Connecticut St. Spec. Tax Oblig., Trans. Infrastructure
Rev.,
Ser. 90I, F.R.W.D. VMIG1 3.65 9/06/95 2,000 2,000,000
Davies Cnty. Solid Wst. Disp. Fac. Rev., Scott Paper Co.
Proj., Ser. 93B, F.R.D.D. VMIG1 3.70 9/01/95 700 700,000
Dist. of Columbia Rev.,
Gen. Oblig., Rev., Ser. 92A-1, F.R.D.D. VMIG1 3.70 9/01/95 300 300,000
Gen. Oblig., Rev., Ser. 92A-3, F.R.D.D. VMIG1 3.70 9/01/95 1,000 1,000,000
Gen. Oblig., Rev., Ser. 92A-6, F.R.D.D. VMIG1 3.70 9/01/95 1,500 1,500,000
Fairfield Connecticut, B.A.N., NR 5.25 1/16/96 1,000 1,001,321
Gulf Coast Ind. Dev. Auth., Citgo Petroleum, Ser. 94,
F.R.D.D. VMIG1 3.70 9/01/95 500 500,000
Harris County Texas Ind. Dev. Co., Exxon Corp., Ser. 87,
F.R.D.D. P1 3.65 9/01/95 600 600,000
Hartford Connecticut Redevelopment Agency MultiFamily
Mortgage,
Ser. 90, F.R.W.D. NR 3.60 9/07/95 2,800 2,800,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-63
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
King George County Virginia Ind. Dev. Auth.,
Birchwood Pwr. Proj., Ser. 94, F.R.D.D NR 3.75% 9/01/95 $ 500 $ 500,000
Birchwood Pwr. Proj., Ser. 94B, F.R.D.D NR 3.75 9/01/95 1,000 1,000,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 2,600 2,600,000
Puerto Rico Comnwlth. Hwy. & Trans. Auth. Rev., Ser. 85,
F.R.W.D. VMIG1 3.20 9/06/95 2,300 2,300,000
Puerto Rico Hsg. Fin. Corp., MultiFamily Mtge. Rev.,
Portfolio A, Ser. 901, M.T.H.O.T. Aa 3.70 9/15/95 2,165 2,165,000
Puerto Rico Ind. Med. & Environ. Facs.,
Ana G. Mendez Ed. Fndtn., Ser. 85, F.R.W.D. A-1* 3.60 9/06/95 1,500 1,500,000
Inter Amer. Proj., Ser. 88, T.E.C.P. VMIG1 3.45 10/11/95 1,800 1,800,000
Reynolds Metal Co. Proj., Ser. 83, A.O.T. P1 3.75 9/01/96 3,000 2,997,327
Schering-Plough Corp., Ser. 83A, A.O.T. AAA* 4.35 12/01/95 2,500 2,497,588
Puerto Rico Public Bldgs. Auth. Rev., Ser. SG34, F.R.W.D. NR 3.60 9/07/95 3,000 3,000,000
Stamford Connecticut Housing Authority Revenue Morgan
Street Project, Ser. 94, F.R.W.D VMIG1 3.55 9/06/95 1,400 1,400,000
-----------
Total Investments--101.0%
(amortized cost--$63,470,365(c)) 63,470,365
Liabilities in excess of other assets--(1.0)% (603,580)
-----------
Net Assets--100% $62,866,785
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.T.--Annual Mandatory Tender.
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.M.D.--Floating Rate (Monthly) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
M.T.H.O.T.--Monthly Optional Tender.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate
of interest is adjusted.
(c) The cost of securities for federal income tax purposes is substantially
the same as for financial reporting purposes.
* Standard & Poor's rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-64
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $ 63,470,365
Cash......................................................................................................... 38,027
Receivable for Fund shares sold.............................................................................. 1,163,721
Interest receivable.......................................................................................... 359,529
Receivable for investments sold.............................................................................. 25,000
Deferred expenses............................................................................................ 14,976
------------
Total assets.............................................................................................. 65,071,618
------------
Liabilities
Payable for investments purchased............................................................................ 1,097,327
Payable for Fund shares reacquired........................................................................... 1,003,145
Accrued expenses............................................................................................. 67,968
Dividends payable............................................................................................ 24,177
Management fee payable....................................................................................... 6,889
Distribution fee payable..................................................................................... 3,727
Deferred Trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 2,204,833
------------
Net Assets................................................................................................... $ 62,866,785
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 628,668
Paid-in capital in excess of par.......................................................................... 62,238,117
------------
Net assets, August 31, 1995.................................................................................. $ 62,866,785
------------
------------
Net asset value, offering price and redemption price per share ($62,866,785 / 62,866,785 shares of beneficial
interest issued and outstanding; unlimited number of shares authorized)................................... $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-65
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest and discount earned............... $ 2,111,441
---------------
Expenses
Management fee, net of waiver of
$214,138................................ 71,379
Distribution fee........................... 71,379
Custodian's fees and expenses.............. 62,000
Transfer agent's fees and expenses......... 35,000
Registration fees.......................... 28,000
Reports to shareholders.................... 20,900
Amortization of organization expense....... 15,133
Audit fee.................................. 10,500
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 4,532
---------------
Total expenses.......................... 332,023
Less: custodian fee credit.................... (33,213)
---------------
Net expenses............................ 298,810
---------------
Net investment income......................... 1,812,631
---------------
Realized Gain on Investments
Net realized gain on investment
transactions............................... 714
---------------
Net Increase in Net Assets Resulting from
Operations.................................... $ 1,813,345
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income.......... $ 1,812,631 $ 1,208,289
Net realized gain (loss) on
investment transactions..... 714 (4,743)
------------ ------------
Net increase in net assets
resulting from operations... 1,813,345 1,203,546
------------ ------------
Dividends and distributions to
shareholders................... (1,813,345) (1,203,546)
------------ ------------
Series share transactions (at $1
per share)
Net proceeds from shares
sold........................ 234,075,262 210,712,023
Net asset value of shares
issued to shareholders in
reinvestment of dividends... 1,751,916 1,156,043
Cost of shares reacquired...... (227,262,566) (215,359,425)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ 8,564,612 (3,491,359)
------------ ------------
Total increase (decrease)......... 8,564,612 (3,491,359)
Net Assets
Beginning of year................. 54,302,173 57,793,532
------------ ------------
End of year....................... $ 62,866,785 $ 54,302,173
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-66
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Connecticut Money Market Series (the
``Series'') commenced investment operations on August 5, 1991. The Series is
non-diversified and seeks to provide the highest level of income that is exempt
from Connecticut State, local and federal income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities having a maturity of
thirteen months or less and whose ratings are within the two highest ratings
categories by a nationally recognized statistical rating organization, or if not
rated, are of comparable quality. The ability of the issuers of the securities
held by the Series to meet their obligations may be affected by economic
developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $52,600 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Custody Fee Credits: The Series has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. For the fiscal
year ended August 31, 1995, PMF voluntarily waived 75% of its management fee.
The amount of fees waived for the fiscal year ended August 31, 1995 amounted to
$214,138 ($.003 per share; .375% of average net assets, as annualized).
The Fund has a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''). To reimburse PMFD for its expenses incurred pursuant to a plan
of distribution, the Fund pays PMFD a reimbursement, accrued daily and payable
monthly, at an annual rate of .125 of 1% of the Series' average daily net
assets. PMFD pays various broker-dealers, including Prudential Securities
Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B-67
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $31,000 for the services of PMFS. As
of August 31, 1995, approximately $2,500 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-68
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 5,
1991(a)
Year Ended August 31, through
------------------------------------------------ August 31,
1995 1994 1993 1992 1991
------ ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains(c)... .032 .020 .022 .034 .003
Dividends and distributions to shareholders... (.032) (.020) (.022) (.034) (.003)
------ ------- ------- ------- ----------
Net asset value, end of period................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------- ------- ------- ----------
------ ------- ------- ------- ----------
TOTAL RETURN(d):.............................. 3.16% 2.02% 2.20% 3.42% .30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 62,867 $54,302 $57,794 $40,480 $ 10,904
Average net assets (000)...................... $ 57,103 $60,594 $53,152 $33,964 $ 6,730
Ratios to average net assets(c):
Expenses, including distribution fee........ .581% .542% .387% .125% .125%(b)
Expenses, excluding distribution fee........ .456% .417% .262% .00% .00%(b)
Net investment income....................... 3.17% 1.99% 2.17% 3.20% 4.42%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of management fee waiver and/or expense subsidy.
(d) Total return includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-69
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Connecticut Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Connecticut
Money Market Series, as of August 31, 1995, the related statements of operations
for the year then ended and of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the four
years in the period then ended and for the period August 5, 1991 (commencement
of investment operations) through August 31, 1991. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatment. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Connecticut Money Market Series, as of August 31, 1995, the results
of its operations, the changes in net assets, and its financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-70
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--93.6%
- ------------------------------------------------------------------------------------------------------------------------------
Alachua Cnty. Hlth. Facs. Auth. Rev.,
Santa Fe Healthcare Facs. Proj. Baa 7.60% 11/15/13 $ 1,750 $ 1,870,697
Alachua Cnty. Ind. Dev. Rev., HB Fuller Co. Proj. NR 7.75 11/01/16 3,000 3,146,130
Brevard Cnty. Edl. Facs. Auth. Rev.,
Florida Inst. of Tech. BBB(g) 6.875 11/01/22 1,500 1,517,565
Wuesthoff Mem. Hosp., Ser. A, M.B.I.A. Aaa 6.625 4/01/13 1,000 1,066,920
Brevard Cnty. Sch. Brd. Ctfs. of Part., Ser. A,
A.M.B.A.C. Aaa 6.50 7/01/12 3,500 3,716,790
Broward Cnty. Edl. Facs. Auth. Rev.,
Nova Univ. Dorm. Proj., Ser. A BBB(g) 7.50 4/01/17 1,500 (c) 1,732,020
Broward Cnty. Hlth. Facs Auth., North Beach Hosp.,
M.B.I.A. Aaa 6.75 8/15/06 1,000 1,103,500
Broward Cnty. Wtr. & Swr. Rev., A.M.B.A.C. Aaa 5.125 10/01/15 1,000 920,480
Cape Canaveral Hosp. Dist. Rev., Ctfs. of Part.,
A.M.B.A.C. Aaa 6.875 1/01/21 1,000 1,067,610
City of Cocoa Wtr. & Swr. Rev., A.M.B.A.C. Aaa 5.00 10/01/23 1,000 874,730
City of Miami Beach Wtr. & Swr. Rev., F.S.A. Aaa 5.375 9/01/15 3,000 2,833,260
Clay Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. A, G.N.M.A. Aaa 7.45 9/01/23 375 399,394
Coral Springs Impvt. Dist., Wtr. & Swr. Rev., M.B.I.A. Aaa 6.00 6/01/10 1,000 1,058,280
Dade Cnty. Aviation Dept. Rev., Aaa 6.60 10/01/22 1,500 1,562,205
Ser. E, A.M.B.A.C. Aaa 5.50 10/01/10 1,000 993,870
Dade Cnty. Hlth. Facs. Auth. Rev.,
Baptist Hosp. of Miami Proj., Ser. A, M.B.I.A. Aaa 6.75 5/01/08 500 534,260
Dade Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., G.N.M.A., Ser. B Aaa 7.25 9/01/23 360 (d) 380,189
Sngl. Fam. Mtge., G.N.M.A., Ser. C Aaa 7.75 9/01/22 915 980,495
Dade Cnty. Pub. Facs. Rev., Jackson Mem. Hosp., Ser. A,
M.B.I.A. Aaa 4.875 6/01/15 3,000 2,621,640
Dade Cnty. Pub. Impvt. Rev., J & K Seaport, A.M.B.A.C. Aaa 6.50 10/01/26 5,500 5,739,140
Dade Cnty. Sch. Dist.,
Gen. Oblig. M.B.I.A. Aaa 5.00 8/01/11 1,235 1,147,710
Gen. Oblig. M.B.I.A. Aaa 5.00 8/01/13 1,500 1,365,750
Dade Cnty. Wtr. & Swr. Sys. Rev., F.G.I.C. Aaa 5.00 10/01/13 1,500 1,365,030
Duval Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge.,
G.N.M.A. AAA(g) 8.375 12/01/14 630 672,853
Enterprise Cmnty. Dev. Dist., Osceola Co. Spl. Assmnt.,
M.B.I.A. Aaa 6.00 5/01/10 2,320 2,427,973
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-71
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Inc., Ser. A BBB+(g) 8.70% 10/01/14 $ 1,830 $ 2,053,681
Escambia Cnty. Poll. Ctrl. Rev., Champion Int'l. Corp.
Proj. Baa1 6.90 8/01/22 3,500 3,663,695
Florida St. Brd. of Ed., Cap. Outlay Aa 5.125 6/01/22 1,000 887,700
Florida St. Dept. of Trans., Ser. A, A.M.B.A.C. Aaa 7.20 7/01/11 1,000(c)(e) 1,154,750
Florida St. Gen. Oblig., Ref. Dade Cnty. Rd. Aa 5.125 7/01/13 1,500 1,391,415
Gainesville Utils. Sys. Rev., Ser. A Aa 6.50 10/01/22 2,150 2,251,867
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj., Ser. 9 Aa2 8.00 5/01/22 1,750 2,080,995
Hillsborough Cnty. Solid Wst. & Res. Rec., M.B.I.A. Aaa 5.70 10/01/08 1,000 1,033,250
Jacksonville Elec. Auth. Rev.,
Elec. Sys. 3-B Aa1 5.20 10/01/13 1,000 920,670
St. Johns Rvr. Pwr. Park Aa1 Zero 10/01/10 3,000 1,264,560
Jacksonville Hlth. Facs. Auth. Hosp. Rev.,
Daughters Of Charity, Ser. A Aa 5.00 11/15/15 1,000 877,330
Nat'l. Ben. Assoc. Baa1 7.00 12/01/22 1,825 1,842,009
St. Lukes Hosp. Assoc. Proj. AA+(g) 7.125 11/15/20 1,000 1,077,790
Jacksonville Wtr. & Swr. Dev. Rev.,
United Water Florida Proj., A.M.B.A.C. Aaa 6.35 8/01/25 1,500 1,533,885
Suburban Utils. A3 6.75 6/01/22 1,000 1,066,470
Lake Cnty. Res. Rec. Ind. Dev. Rev., Ser. A Baa 5.95 10/01/13 1,035 971,751
Lee Cnty. Trans. Facs. Rev., A.M.B.A.C. Aaa 6.75 10/01/11 1,000 1,084,680
Leon Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. A, G.N.M.A. Aaa 7.30 4/01/21 445 470,917
Martin Cnty., A.M.B.A.C. Aaa 4.50 2/01/09 1,575 1,400,679
Martin Cnty. Ind. Dev. Auth. Rev., Indiantown Cogen
Proj. Baa3 7.875 12/15/25 1,200 1,329,444
Miami Hlth. Facs. Auth. Hosp. Rev., Mercy Hosp. A 8.125 8/01/11 1,000 1,098,500
Miami Spec. Oblig.,
Admin. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/16 1,500 1,507,515
Admin. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/25 500 502,925
Miramar Wstwtr. Impvt. Assmt., F.G.I.C. Aaa 6.75 10/01/16 2,500 2,683,150
Ocala Cap. Impvt. Rev., A.M.B.A.C. Aaa 5.00 10/01/18 3,000 2,654,880
Okaloosa Cnty. Cap. Impvt. Rev., M.B.I.A. Aaa Zero 12/01/06 450 252,023
Orange Cnty. Hlth. Facs. Auth., Adventist Hlth. Sys.,
A.M.B.A.C. Aaa 5.25 11/15/20 3,000 2,716,380
Orange Cnty. Hsg. Fin. Auth. Mtge. Rev.,
Ser. A, G.N.M.A. AAA(g) 7.375 9/01/24 420 448,505
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-72
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Orange Cnty. Hsg. Fin. Auth. Mtge. Rev.,
MultiFam. Ashley Point Apts. BBB+(g) 6.85% 10/01/16 $ 1,200 $ 1,228,896
MultiFam. Ashley Point Apts. BBB+(g) 7.10 10/01/24 855 878,812
Orange Cnty. Sales Tax Rev., Ser. B A1 5.375 1/01/24 2,000 1,833,020
Orlando & Orange Cnty. Expwy. Auth. Rev.,
Sr. Lein, A.M.B.A.C. Aaa 5.25 7/01/14 1,000 933,040
Jr. Lein A-(g) 5.95 7/01/23 1,750 1,687,665
Orlando Utils. Comn.,
Wtr. & Elec. Rev. Aa1 5.125 10/01/19 1,500 1,339,080
Wtr. & Elec. Rev. Aa 5.25 10/01/23 1,690 1,525,124
Wtr. & Elec. Rev., Ser. D Aa 6.75 10/01/17 4,200 (d) 4,738,314
Palm Beach Cnty. Arpt. Sys. Rev., M.B.I.A. Aaa 7.75 10/01/10 1,000 1,162,050
Palm Beach Cnty. Hlth. Facs. Auth. Rev.,
Good Samaritan Hlth. Sys. A+(g) 6.30 10/01/22 1,000 1,008,820
Pasco Cnty. Sch. Brd. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.40 8/01/06 1,000 1,067,120
Pensacola Hlth. Facs. Auth.,
Daughters of Charity, M.B.I.A. Aaa 5.25 1/01/11 1,600 1,520,624
Polk Cnty. Hsg. Fin. Auth.,
Sngle. Fam. Mtge., Ser. A, G.N.M.A Aaa 7.875 9/01/22 1,330 1,425,427
Polk Cnty. Sch. Brd., Ctfs. of Part., F.S.A. Aaa 4.875 1/01/18 1,000 864,680
Puerto Rico Gen. Oblig.,
M.B.I.A. Aaa 5.00 7/01/21 1,750 1,550,762
F.S.A. Aaa 7.723 7/01/20 3,000 (d)(f) 2,936,250
Puerto Rico Elec. Pwr. Auth. Rev., Ser. R Baa1 6.25 7/01/17 2,500 2,533,525
Puerto Rico Ind. Tour. Edl. Hosp. Auxil.,
Mut. Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/24 2,635 2,692,654
Puerto Rico Pub. Bldgs. Auth., A.M.B.A.C. Aaa 5.50 7/01/21 1,905 1,814,112
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.763 1/16/15 2,250 (f) 2,041,875
St Lucie Cnty. Sales Tax Rev., F.G.I.C. Aaa 5.00 10/01/19 2,500 2,206,650
St. Petersburg Hlth. Facs. Auth. Rev.,
Allegheny Hlth. Prog., M.B.I.A. Aaa 7.00 12/01/15 1,000 1,095,330
Tampa Allegheny Hlth. Sys. Rev., St. Mary's Hosp.,
M.B.I.A. Aaa 5.125 12/01/23 1,000 881,510
Tampa Gtd. Entitlement Rev., A.M.B.A.C. Aaa 7.05 10/01/07 2,000 2,263,680
Venice Hlth. Facs. Rev., Venice Hosp. Proj. A 5.75 12/01/24 1,250 1,163,213
Virgin Islands Pub. Fin. Auth. Rev.,
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 900 949,464
Virgin Islands Territory., Hugo Ins. Claims Fund Proj.,
Ser. 91 NR 7.75 10/01/06 1,335 1,454,723
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-73
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Volusia Cnty. Edl. Facs. Auth. Rev., AAA(g) 6.625% 10/15/22 $ 1,000 $ 1,049,770
Volusia Cnty. Hlth. Facs. Auth. Rev., Mem. Hlth. Sys.
Proj. BBB+(g) 8.25 6/01/20 2,000(c)(d) 2,331,900
------------
Total long-term investments (cost $124,734,361) 129,497,997
------------
SHORT-TERM INVESTMENTS--4.6%
Dade Cnty. Hlth. Facs. Auth. Rev., Miami Children's
Hosp. Proj., F.R.D.D. VMIG1 3.60% 9/01/95 1,100 1,100,000
Jacksonville Hlth. Facs. Auth. Rev., Baptist Med. Ctr.,
M.B.I.A., F.R.D.D. VMIG1 3.55 9/01/95 1,500 1,500,000
Pinellas Cnty. Hlth. Facs. Auth. Rev., Pooled Hosp. Loan
Proj., F.R.D.D. VMIG1 3.55 9/01/95 1,100 1,100,000
St Lucie Cnty. Pwr. & Lt. Rev., T.E.C.P. VMIG1 3.60 10/30/95 2,700 2,700,000
------------
Total short-term investments (cost $6,400,000) 6,400,000
------------
Total Investments--98.2%
(cost $131,134,361; Note 5) 135,897,997
Other assets in excess of liabilities--1.8% 2,418,946
------------
Net Assets--100% $138,316,943
------------
------------
</TABLE>
- ---------------
<TABLE>
<C> <S>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note.(b)
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of
the next date on which the security can be redeemed at par or the next date on which the rate of interest is adjusted.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(d) Indicates a when-issued security.
(e) Pledged as initial margin on financial futures contracts.
(f) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
(g) Standard & Poor's rating.
N.R.--Not Rated by Moody's or Standard & Poor's.
</TABLE>
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-74
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $131,134,361).................................................................... $135,897,997
Cash......................................................................................................... 102,822
Interest receivable.......................................................................................... 2,329,970
Receivable for investments sold.............................................................................. 1,044,814
Due from Manager............................................................................................. 201,510
Receivable for Fund shares sold.............................................................................. 72,952
Due from Distributors........................................................................................ 13,827
Prepaid expenses............................................................................................. 2,745
------------
Total assets.............................................................................................. 139,666,637
------------
Liabilities
Payable for Fund shares reacquired........................................................................... 1,101,410
Accrued expenses and other liabilities....................................................................... 173,277
Dividends payable............................................................................................ 44,501
Due to broker - variation margin payable..................................................................... 28,906
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 1,349,694
------------
Net Assets................................................................................................... $138,316,943
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 137,510
Paid-in capital in excess of par.......................................................................... 138,281,465
------------
138,418,975
Accumulated net realized loss on investments.............................................................. (4,818,793)
Net unrealized appreciation on investments................................................................ 4,716,761
------------
Net assets, August 31, 1995.................................................................................. $138,316,943
------------
------------
Class A:
Net asset value and redemption price per share
($120,962,492 / 12,025,745 shares of beneficial interest issued and outstanding)....................... $10.06
Maximum sales charge (3.0% of offering price)............................................................. .31
------------
Maximum offering price to public.......................................................................... $10.37
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($8,326,253 / 827,698 shares of beneficial interest issued and outstanding)............................ $10.06
------------
------------
Class C:
Net asset value, offer price and redemption price per share
($9,028,198 / 897,559 shares of beneficial interest issued and outstanding)............................ $10.06
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-75
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 8,710,600
---------------
Expenses
Management fee, net waiver of $464,337... 231,778
Distribution fee--Class A, net waiver of
$41,745............................... 82,514
Distribution fee--Class B................ 23,495
Distribution fee--Class C................ 76,991
Custodian's fees and expenses............ 135,000
Transfer agent's fees and expenses....... 65,000
Reports to shareholders.................. 60,000
Registration fees........................ 42,000
Audit fee................................ 11,000
Legal fees............................... 16,000
Trustees' fees........................... 3,200
Miscellaneous............................ 17,037
---------------
Total expenses........................ 764,015
Less: expense subsidy (Note 4)........... (349,237)
Less: custodian fee credit............... (17,642)
---------------
Net expenses.......................... 397,136
---------------
Net investment income....................... 8,313,464
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized loss on:
Investment transactions.................. (3,626,120)
Financial futures contracts.............. (529,354)
---------------
(4,155,474)
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 6,157,898
Financial futures contracts.............. (132,656)
---------------
6,025,242
---------------
Net gain on investments..................... 1,869,768
---------------
Net Increase in Net Assets
Resulting from Operations................... $10,183,232
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations
Net investment income.......... $ 8,313,464 $ 8,768,570
Net realized loss on investment
transactions................ (4,155,474) (8,676)
Net change in unrealized
appreciation (depreciation)
of investments.............. 6,025,242 (11,870,836)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 10,183,232 (3,110,942)
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A..................... (7,502,100) (8,305,093)
Class B..................... (262,158) (582)
Class C..................... (549,206) (462,895)
------------ ------------
(8,313,464) (8,768,570)
------------ ------------
Distributions to shareholders
from net realized gains
Class A..................... -- (2,821,851)
Class B..................... -- --
Class C..................... -- (142,331)
------------ ------------
-- (2,964,182)
------------ ------------
Series share transactions (Note 6)
Net proceeds from shares
sold........................ 26,011,068 35,379,732
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 3,653,143 5,323,495
Cost of shares reacquired...... (39,832,414) (31,275,509)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (10,168,203) 9,427,718
------------ ------------
Total decrease.................... (8,298,435) (5,415,976)
Net Assets
Beginning of year................. 146,615,378 152,031,354
------------ ------------
End of year....................... $138,316,943 $146,615,378
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-76
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund, (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Florida Series (the ``Series'') commenced
investment operations on December 28, 1990. The Series is non-diversified and
seeks to achieve its investment objective of providing the maximum amount of
income that is exempt from federal income taxes with the minimum of risk, and
investing in securities which will enable its shares to be exempt from the
Florida intangibles tax by investing in ``investment grade'' tax-exempt
securities whose ratings are within the four highest ratings categories by a
nationally recognized statistical rating organization or, if not rated, are of
comparable quality. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic developments in a
specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Options: The Series may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Series currently owns or intends to purchase.
When the Series purchases an option, it pays a premium and an amount equal to
that premium is recorded as an investment. When the Series writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Series
realizes a gain or loss to the extent of the premium received or paid. If an
option is exercised, the premium received or paid is an adjustment to the
proceeds from the sale or the cost basis of the purchase in determining whether
the Series has realized a gain or loss. The difference between the premium and
the amount received or paid on effecting a closing purchase or sale transaction
is also treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Series, as writer of an option, has no control over whether the underlying
securities or currencies may be sold (called) or purchased (put). As a result,
the Series bears the market risk of an unfavorable change in the price of the
security or currency underlying the written option. The Series, as purchaser of
an option, bears the risk of the potential inability of the counterparties to
meet the terms of their contracts.
- --------------------------------------------------------------------------------
B-77
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason and because substantially all of the Series' gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Expenses: The Series incurred approximately $32,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending December 1995.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. For the four
months ended December 31, 1994, PMF waived 60% of its management fee. For the
eight months ended August 31, 1995, PMF waived 70% of its management fee. The
amount of fees waived during the year ended August 31, 1995 amounted to $464,337
($.03 per share for Class A, B and C shares; .33% of average net assets). The
Series is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and .75 of 1%, of the average daily net assets of the Class A, B and C
shares, respectively. With respect to the Class A Plan, PMFD voluntarily agreed
to waive its distribution fee, currently limited to .10 of 1% of average net
assets, for the period September 1, 1994 through December 31, 1994. Effective
January 1, 1995, PMFD eliminated its waiver. The amount of distribution fees
waived by PMFD was $41,745 ($.003 per share for Class A shares; .03% of Class A
average net assets) for the fiscal year ended August 31, 1995. Such expenses
under the Class A, B and C Plans were .07 of 1%, .50 of 1% and .75 of 1% of the
average daily net assets, respectively, for the fiscal year ended August 31,
1995.
PMFD has advised the Series that it has received approximately $170,300 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $7,500 and $1,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
- --------------------------------------------------------------------------------
B-78
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $41,700 for the services of PMFS. As
of August 31, 1995, approximately $3,200 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Expense Subsidy
PMF voluntarily subsidized all operating expenses (except management and
distribution fees) of the Class A, Class B and Class C shares of the Series
until further notice. For the year ended August 31, 1995, PMF subsidized
$349,237 ($.03 per share for Class A, B and C shares; .25% of average net
assets) of the Series' expenses. The Series is not required to reimburse PMF for
such subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended August 31, 1995 were $86,432,314 and $102,993,871,
respectively.
The cost basis of investments for federal income tax purposes as of August 31,
1995 was $131,135,611 and, accordingly, net unrealized appreciation was
$4,762,386 (gross unrealized appreciation--$6,087,823; gross unrealized
depreciation--$1,325,437).
The Series has a capital loss carryforward of $2,726,000, which expires in 2003.
The Series will elect to treat net realized capital losses of approximately
$2,138,200 incurred in the ten month period ended August 31, 1995 as having been
incurred in the following fiscal year.
At August 31, 1995 the Series sold 55 financial futures contracts on the
Municipal Bond Index expiring in September 1995. The value at disposition of
such contracts was $6,202,344. The value of such contracts on August 31, 1995
was $6,249,219, thereby resulting in an unrealized loss of $46,875.
- ------------------------------------------------------------
Note 6. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares, which prior to August
1, 1994 were known as D shares, are sold with a contingent deferred sales charge
of 1% during the first year. Class B shares will automatically convert to Class
A shares on a quarterly basis approximately seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value per share. Transactions in shares of beneficial interest for the
years ended August 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 1,647,106 $ 15,829,864
Shares issued in reinvestment of
dividends......................... 327,990 3,198,613
Shares reacquired................... (3,554,066) (34,407,990)
---------- ------------
Net decrease in shares
outstanding....................... (1,578,970) $(15,379,513)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 2,274,149 $ 24,062,897
Shares issued in reinvestment of
dividends and distributions....... 475,125 4,935,129
Shares reacquired................... (2,838,050) (29,205,030)
---------- ------------
Net decrease in shares
outstanding....................... (88,776) $ (207,004)
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 945,274 $ 9,166,110
Shares issued in reinvestment of
dividends......................... 11,460 113,360
Shares reacquired................... (187,734) (1,825,550)
---------- ------------
Net increase in shares
outstanding....................... 769,000 $ 7,453,920
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold......................... 58,689 $ 579,300
Shares issued in reinvestment of
dividends......................... 24 235
Shares reacquired................... (15) (150)
---------- ------------
Net increase in shares
outstanding....................... 58,698 $ 579,385
---------- ------------
---------- ------------
</TABLE>
- ------------------
* Commencement of offering of Class B shares.
- --------------------------------------------------------------------------------
B-79
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 104,420 $ 1,015,094
Shares issued in reinvestment of
dividends......................... 34,986 341,170
Shares reacquired................... (370,059) (3,598,874)
---------- ------------
Net decrease in shares
outstanding....................... (230,653) $ (2,242,610)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 1,004,802 $ 10,737,535
Shares issued in reinvestment of
dividends and distributions....... 37,628 388,131
Shares reacquired................... (202,212) (2,070,329)
---------- ------------
Net increase in shares
outstanding....................... 840,218 $ 9,055,337
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-80
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------------------------------- -----------
December 28,
1990(a)
Years Ended August 31, through Year Ended
----------------------------------------------- August 31, August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 9.55 $ 9.91
-------- -------- -------- -------- --------- -----------
Income from investment operations
Net investment income(c)................ .59 .59 .57 .65 .44 .55
Net realized and unrealized gain (loss)
on investment transactions........... .15 (.76) .73 .51 .21 .15
-------- -------- -------- -------- --------- -----------
Total from investment operations..... .74 (.17) 1.30 1.16 .65 .70
-------- -------- -------- -------- --------- -----------
Less distributions
Dividends from net investment income.... (.59) (.59) (.57) (.65) (.44) (.55)
Distributions from net realized gains... -- (.20) (.13) -- -- --
-------- -------- -------- -------- --------- -----------
Total distributions.................. (.59) (.79) (.70) (.65) (.44) (.55)
-------- -------- -------- -------- --------- -----------
Net asset value, end of period.......... $ 10.06 $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 10.06
-------- -------- -------- -------- --------- -----------
-------- -------- -------- -------- --------- -----------
TOTAL RETURN(f):........................ 7.85% (1.69)% 13.78% 12.26% 6.90% 7.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $120,963 $134,849 $148,900 $104,335 $63,929 $8,326
Average net assets (000)................ $124,259 $146,489 $123,820 $ 82,893 $41,528 $4,699
Ratios to average net assets(c):
Expenses, including distribution
fees.............................. .24% .20% .20% .09% 0 .67%
Expenses, excluding distribution
fees.............................. .17% .20% .20% .09% 0 .17%
Net investment income................ 6.04% 5.67% 5.94% 6.41% 6.68%(b) 5.56%
Portfolio turnover rate................. 65% 75% 68% 56% 39% 65%
<CAPTION>
Class B Class C
------------ -----------------------------------
<S> <C> <C> <C> <C>
August 1, July 26,
1994(e) Years Ended August 1993(d)
through 31, through
August 31, ------------------- August 31,
1994 1995 1994 1993
---------- ------- ------- -----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.95 $ 9.91 $ 10.87 $ 10.58
-------- ------- ------- -----------
Income from investment operations
Net investment income(c)................ .04 .53 .48 .03
Net realized and unrealized gain (loss)
on investment transactions........... (.04) .15 (.76) .29
-------- ------- ------- -----------
Total from investment operations..... -- .68 (.28) .32
-------- ------- ------- -----------
Less distributions
Dividends from net investment income.... (.04) (.53) (.48) (.03)
Distributions from net realized gains... -- -- (.20) --
-------- ------- ------- -----------
Total distributions.................. (.04) (.53) (.68) (.03)
-------- ------- ------- -----------
Net asset value, end of period.......... $ 9.91 $ 10.06 $ 9.91 $ 10.87
-------- ------- ------- -----------
-------- ------- ------- -----------
TOTAL RETURN(f):........................ (0.05)% 7.12% (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $582 $9,028 $11,185 $3,132
Average net assets (000)................ $118 $10,265 $ 9,280 $1,038
Ratios to average net assets(c):
Expenses, including distribution
fees.............................. .70%(b) .92% .95% .95%(b)
Expenses, excluding distribution
fees.............................. .20%(b) .17% .20% .20%(b)
Net investment income................ 6.21%(b) 5.35% 4.99% 5.19%(b)
Portfolio turnover rate................. 75% 65% 75% 68%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and fee waiver.
(d) Commencement of offering of Class C shares. Prior to August 1, 1994, Class C shares were called Class D shares.
(e) Commencement of offering of Class B shares.
(f) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-81
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report FLORIDA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Florida Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Florida
Series, as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the four years in the
period then ended and for the period December 28, 1990 (commencement of
investment operations) through August 31, 1991. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Florida Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-82
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.3%
- ------------------------------------------------------------------------------------------------------------------------------
Guam Gov't., Ser. A BBB(e) 5.90% 9/01/05 $ 500 $496,650
Guam Pwr. Auth. Rev.,
Ser. A BBB(e) 6.625 10/01/14 250 256,192
Ser. A BBB(e) 6.75 10/01/24 525 536,046
Hawaii St. Arpt. Sys. Rev. A 7.00 7/01/18 365 382,630
Hawaii St. Arpt. Sys. Rev., 2nd Ser. 90, F.G.I.C. Aaa 7.50 7/01/20 500 551,370
Hawaii St. Dept. Budget & Fin.,
Kapiolani Hlth. Care Sys. A 6.30 7/01/08 500 511,340
Mtg. Rev., Hawaiian Elec. Co., Ser. C, M.B.I.A. Aaa 7.375 12/01/20 500 554,055
Queens Med. Ctr. Proj., F.G.I.C. Aaa 5.90 7/01/07 230 238,627
Hawaii St. Harbor Cap. Impvt. Rev.,
F.G.I.C. Aaa 6.25 7/01/10 250 (d) 260,972
F.G.I.C. Aaa 6.25 7/01/15 500 509,800
Hawaii St. Hsg. Fin. & Dev. Corp., Sngl. Fam. Mtge. Rev.,
Ser. B, F.N.M.A. Aa 5.85 7/01/17 500 486,740
Hawaii St., Gen. Oblig., Ser. CJ Aa 6.25 1/01/15 650 667,017
Honolulu Hawaii City & Cnty., Ser. D Aaa 6.70 12/01/02 450 (c) 500,463
Maui Cnty., Ref., F.G.I.C. Aaa 5.125 12/15/10 500 478,740
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.45 7/01/17 500 516,875
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O,
(Frmly. Puerto Rico Comnwlth.Wtr. Res. Auth.) Baa1 5.00 7/01/12 600 536,910
Puerto Rico Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev.,
G.N.M.A. Aaa 6.40 10/15/06 750 797,205
Puerto Rico Hwy. & Trans. Auth. Rev. Baa1 6.375 7/01/08 500 526,305
Puerto Rico Ind., Tourist, Edu., Med. & Envir. Ctrl. Facs.,
Doctor Pila Hosp. Proj., F.H.A. AAA(e) 6.125 8/01/25 500 (b) 501,855
Hosp. Auxilio Mutuo Oblig. Grp. Proj.,
M.B.I.A. Aaa 6.25 7/01/16 500 515,305
M.B.I.A. Aaa 6.25 7/01/24 250 255,470
Puerto Rico Mun. Fin. Agcy., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 253,553
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 5.449 1/16/15 1,000 953,940
Puerto Rico Univ. Rev., Ser. M, M.B.I.A. Aaa 5.25 6/01/25 750 685,853
Univ. of Hawaii Sys. Rev., Ser. G, A.M.B.A.C. Aaa 5.45 10/01/06 280 287,039
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-83
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Virgin Islands Pub. Fin. Auth. Rev.,
Gov't. Dev. Proj., Ser. B BBB-(e) 7.375% 10/01/10 $ 300 $ 327,402
Hwy. Trans. Trust Fund, Ser. A NR 7.25 10/01/18 250 263,740
-----------
Total long-term investments (cost $12,356,446) 12,852,094
SHORT-TERM INVESTMENTS--6.1%
Hawaii St. Dept. Budget & Fin., Adventist Hlth. Sys/West,
Ser. 94, F.R.W.D. VMIG1 3.35 9/06/95 100 100,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 700 700,000
-----------
Total short-term investments (cost $800,000) 800,000
Total Investments--104.4%
(cost $13,156,446; Note 5) 13,652,094
Liabilities in excess of other assets--(4.4)% (572,880)
-----------
Net Assets--100% $13,079,214
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.N.M.A.--Federal National Mortgage Association.
F.R.W.D.--Floating Rate Weekly Demand Note(f).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Indicates a when-issued security.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Pledged as initial margin on financial futures contracts.
(e) Standard & Poor's rating.
(f) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-84
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $13,156,446)...................................................................... $13,652,094
Cash.......................................................................................................... 62,256
Interest receivable........................................................................................... 177,528
Receivable for Fund shares sold............................................................................... 36,768
Due from Manager.............................................................................................. 1,635
Other assets.................................................................................................. 84,982
-----------
Total assets............................................................................................... 14,015,263
-----------
Liabilities
Payable for investments purchased............................................................................. 497,347
Payable for Fund shares reacquired............................................................................ 379,881
Accrued expenses.............................................................................................. 43,028
Dividends payable............................................................................................. 7,696
Distribution fee payable...................................................................................... 4,528
Due to broker - variation margin payable...................................................................... 2,969
Deferred trustees' fees....................................................................................... 600
-----------
Total liabilities.......................................................................................... 936,049
-----------
Net Assets.................................................................................................... $13,079,214
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 10,784
Paid-in capital in excess of par........................................................................... 12,492,346
-----------
12,503,130
Accumulated net realized gain on investments............................................................... 94,967
Net unrealized appreciation on investments................................................................. 481,117
-----------
Net assets, August 31, 1995................................................................................... $13,079,214
-----------
-----------
Class A:
Net asset value and redemption price per share
($3,333,130 / 274,820 shares of beneficial interest issued and outstanding)............................. $12.13
Maximum sales charge (3.0% of offering price).............................................................. .38
Maximum offering price to public........................................................................... $12.51
Class B:
Net asset value, offering price and redemption price per share
($8,948,854 / 737,840 shares of beneficial interest issued and outstanding)............................. $12.13
Class C:
Net asset value, offer price and redemption price per share
($797,230 / 65,733 shares of beneficial interest issued and outstanding)................................ $12.13
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-85
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PRUDENTIAL MUNICIPAL SERIES FUND
HAWAII INCOME SERIES HAWAII INCOME SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
September 19, 1994D
through
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................ $ 524,323
---------------
Expenses
Management fee, net of waiver of
$3,651............................... 41,133
Distribution fee--Class A............... 2,641
Distribution fee--Class B............... 29,804
Distribution fee--Class C............... 2,659
Custodian's fees and expenses........... 58,000
Reports to shareholders................. 33,000
Registration fees....................... 26,000
Legal fees.............................. 17,000
Amortization of organization expenses... 13,935
Audit fee............................... 11,000
Transfer agent's fees and expenses...... 3,600
Trustees' fees.......................... 3,200
Miscellaneous........................... 4,398
---------------
Total expenses....................... 246,370
---------------
Less: expense subsidy (Note 4).......... (179,090)
---------------
Net expenses......................... 67,280
---------------
Net investment income...................... 457,043
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................. 100,147
Financial futures contract
transactions......................... (5,180)
---------------
94,967
---------------
Net change in unrealized appreciation/depreciation on:
Investments............................. 495,648
Financial futures contracts............. (14,531)
---------------
481,117
---------------
Net gain on investments.................... 576,084
---------------
Net Increase in Net Assets
Resulting from Operations.................. $ 1,033,127
---------------
---------------
</TABLE>
- ------------
D Commencement of investment operations.
<TABLE>
<CAPTION>
Increase (Decrease) September 19, 1994D
in Net Assets August 31, 1995
<S> <C>
Operations
Net investment income..................... $ 457,043
Net realized gain on investment
transactions........................... 94,967
Net change in unrealized appreciation of
investments............................ 481,117
---------------
Net increase in net assets resulting from
operations............................. 1,033,127
---------------
Dividends from net investment income
(Note 1):
Class A................................ (140,503)
Class B................................ (299,569)
Class C................................ (16,971)
---------------
(457,043)
---------------
Series share transactions (net of share
conversions) (Note 6):
Net proceeds from shares sold............. 13,508,423
Net asset value of shares issued
in reinvestment of dividends........... 199,822
Cost of shares reacquired................. (1,205,115)
---------------
Net increase in net assets from Series
share transactions..................... 12,503,130
---------------
Total increase............................... 13,079,214
Net Assets
Beginning of period.......................... 0
---------------
End of period................................ $13,079,214
---------------
---------------
</TABLE>
- ------------
D Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-86
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Hawaii Income Series (the ``Series'')
commenced investment operations on September 19, 1994. The Series is
non-diversified and seeks to provide the maximum amount of income that is exempt
from Hawaii State and federal income taxes consistent with the preservation of
capital by investing in investment grade municipal obligations but may also
invest a portion of its assets in lower-quality municipal obligations or in
non-rated securities which, in the opinion of the Fund's investment adviser, are
of comparable quality. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic or political
developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain(loss) on
financial futures contracts. The Series invests in financial futures contracts
in order to hedge its existing portfolio securities or securities the Series
intends to purchase, against fluctuations in value caused by changes in
prevailing interest rates. Should interest rates move unexpectedly, the Series
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts, interest
rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason and because substantially all of the Series' gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Expenses: The Series incurred $98,700 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending September 1999.
- --------------------------------------------------------------------------------
B-87
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''). PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $3,651
($0.004 per share for Class A, B, and C shares; .04% of average net assets). The
Series is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the period ended August 31, 1995.
PMFD has advised the Series that it has received approximately $19,600 in
front-end sales charges resulting from sales of Class A shares during the period
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the period ended August 31, 1995, it
received approximately $12,700 and $100 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended August 31,
1995, the Series incurred fees of approximately $2,500 for the services of PMFS.
As of August 31, 1995, approximately $300 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Expense Subsidy
PMF has agreed to subsidize expenses so that total operating expenses do not
exceed .50%, .90% and 1.15% of the average net assets of the Class A shares,
Class B shares and Class C shares, respectively until further notice. For the
period ended August 31, 1995, PMF subsidized $179,090 ($.22 per share for Class
A, B and C shares; 2.00% of average net assets) of the Series' expenses. The
Series is not required to reimburse PMF for such subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the period ended August 31, 1995 were $16,927,504 and
$4,671,596, respectively.
At August 31, 1995, the Fund sold 5 financial futures contracts on the U.S.
Treasury Index which expire in September 1995. The value at disposition of such
contracts is $565,781. The value of such contracts on August 31, 1995 was
$551,250, thereby resulting in an unrealized loss of $14,531.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of August 31,
1995, net unrealized appreciation for federal income tax purposes was $495,648
(gross unrealized appreciation--$507,204; gross unrealized
depreciation--$11,556).
- --------------------------------------------------------------------------------
B-88
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 6. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Of the 1,078,393 shares of beneficial
interest issued and outstanding at August 31, 1995, PMF owned 171,851 shares.
Transactions in shares of beneficial interest for the period ended August 31,
1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------------- -------- ----------
<S> <C> <C>
September 19, 1994* through
August 31, 1995:
Shares sold............................ 279,870 $3,255,106
Shares issued in reinvestment of
dividends and distributions.......... 1,566 18,665
Shares reacquired...................... (10,702) (123,633)
-------- ----------
Net increase in shares outstanding
before conversion.................... 270,734 $3,150,138
Shares issued upon conversion from
Class B.............................. 4,086 49,084
-------- ----------
Net increase in shares outstanding..... 274,820 $3,199,222
-------- ----------
-------- ----------
<CAPTION>
Class B
- ---------------------------------------
<S> <C> <C>
September 19, 1994* through
August 31, 1995:
Shares sold............................ 816,861 $9,471,988
Shares issued in reinvestment of
dividends and distributions.......... 14,410 171,145
Shares reacquired...................... (89,345) (1,066,264)
-------- ----------
Net decrease in shares outstanding
before conversion.................... 741,926 8,576,869
Shares reacquired upon conversion into
Class A.............................. (4,086) (49,084)
-------- ----------
Net decrease in shares outstanding..... 737,840 $8,527,785
-------- ----------
-------- ----------
<CAPTION>
Class C Shares Amount
- --------------------------------------- -------- ----------
<S> <C> <C>
September 19, 1994* through
August 31, 1995:
Shares sold............................ 66,136 $ 781,329
Shares issued in reinvestment of
dividends............................ 845 10,012
Shares reacquired...................... (1,248) (15,218)
-------- ----------
Net increase in shares outstanding..... 65,733 $ 776,123
-------- ----------
-------- ----------
</TABLE>
- ---------------
* Commencement of investment operations.
- --------------------------------------------------------------------------------
B-89
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 19, 1994(b) through August 31, 1995
-----------------------------------------------------
Class A Class B Class C
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 11.64 $ 11.64 $ 11.64
----- ----- -----
Income from investment operations
Net investment income(d)................................................. .58 .54 .51
Net realized and unrealized gain (loss) on investment transactions....... .49 .49 .49
----- ----- -----
Total from investment operations...................................... 1.07 1.03 1.00
----- ----- -----
Less distributions
Dividends from net investment income..................................... (.58) (.54) (.51)
----- ----- -----
Net asset value, end of period........................................... $ 12.13 $ 12.13 $ 12.13
----- ----- -----
----- ----- -----
TOTAL RETURN(c):......................................................... 9.42% 9.03% 8.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 3,333 $ 8,949 $ 797
Average net assets (000)................................................. $ 2,778 $ 6,270 $ 373
Ratios to average net assets:(a)/(d)
Expenses, including distribution fees................................. .46% .86% 1.11%
Expenses, excluding distribution fees................................. .36% .36% .36%
Net investment income................................................. 5.32% 5.03% 4.79%
Portfolio turnover rate.................................................. 75% 75% 75%
</TABLE>
- ---------------
(a) Annualized.
(b) Commencement of investment operations.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends. Total return is not annualized.
(d) Net of expense subsidy and management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-90
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Hawaii Income Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Hawaii Income
Series as of August 31, 1995, the related statements of operations and of
changes in net assets and the financial highlights for the period September 19,
1994 (Commencement of investment operations) to August 31, 1995. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned as of August 31, 1995
by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Hawaii Income Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
above stated period in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-91
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--93.7%
- ------------------------------------------------------------------------------------------------------------------------------
Baltimore Conv. Ctr. Rev., F.G.I.C. Aaa 5.75% 9/01/08 $ 1,075 $ 1,103,853
Baltimore Econ. Dev. Lease Rev., Armistead Partnership BBB+(c) 7.00 8/01/11 1,000 1,044,210
Gaithersburg Econ. Dev. Rev., Asbury Methodist NR 5.50 1/01/20 1,000 874,080
Gaithersburg Hosp. Facs. Rev., Ref. Impvt., Shady Grove
Adventist Hosp., F.S.A. Aaa 5.50 9/01/15 1,000 955,650
Gaithersburg Nursing Home Rev., Ref., Shady Grove
Adventist, F.S.A Aaa 5.50 9/01/15 1,000 955,650
Howard Cnty., Met. Dist.,
Ser. B Aa1 6.00 8/15/03 1,000 1,085,430
Ser. B Aa1 Zero 8/15/09 2,115 995,932
Kent Cnty., Coll. Rev. Proj. & Ref., Washington Coll. Proj. Baa1 7.70 7/01/18 750 822,788
Maryland St. Econ. Dev. Co., Hilton Street Facility, Ser. A AA(c) 7.00 1/01/10 600 654,234
Maryland St. Hlth. & Higher Edl. Facs., Auth. Rev.,
Doctor's Comn. Hosp. Baa 5.50 7/01/24 1,000 806,730
Howard Cnty. Gen. Hosp. Baa1 5.50 7/01/21 1,000 834,770
Sinai Hosp. of Baltimore, A.M.B.A.C. Aaa 5.25 7/01/19 500 456,265
Sinai Hosp. of Baltimore, A.M.B.A.C. Aaa 5.25 7/01/23 350 315,966
Univ. of Md. Med. Ctr., F.G.I.C. Aaa 5.00 7/01/20 1,000 875,140
Maryland St. Hsg. & Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev. Proj., Fourth Ser. Aa 7.70 4/01/15 920 974,547
Sngl. Fam. Mtge. Rev. Proj., Sixth Ser. Aa 7.125 4/01/14 835 879,547
Sngl. Fam. Mtge. Rev. Proj., Third Ser. Aa 8.00 4/01/18 750 798,773
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. For
Physics BBB(c) 6.625 1/01/17 1,000 1,007,120
Maryland Wtr. Quality Fin. Admin.,
Revolving Loan Fund Rev. Aa 5.40 9/01/13 250 239,188
Revolving Loan Fund Rev., Ser. A Aa 5.90 9/01/04 565 606,143
Montgomery Cnty. Hsg. Opportunities Comn., Sngl. Fam. Mtge.
Rev., F.H.A. AAA(c) 6.25 7/01/25 850 849,898
Montgomery Cnty.,
Cons. Pub. Impvt. Aaa 9.75 6/01/01 450 569,245
Cons. Pub. Impvt., Ser. A Aaa 5.75 10/01/07 1,300 1,374,191
Northeast Waste Disp. Auth.,
Baltimore City Sludge Proj. NR 7.25 7/01/07 957 985,595
Montgomery Cnty. Proj. A 6.30 7/01/16 2,200 2,202,948
Prince Georges Cnty.,
Cons. Pub. Impvt., M.B.I.A. Aaa 5.25 1/01/15 750 708,188
Hosp. Rev., Dimensions Hlth. Corp. A 5.30 7/01/24 1,250 1,058,437
Ref. Cons. Pub. Impvt. A1 5.25 10/01/11 1,000 964,170
Stormwater Mgmt. Aa 6.50 3/15/03 1,140 1,265,913
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-92
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Comnwlth.,
Aqueduct & Swr. Auth. Rev. Aaa 10.25% 7/01/09 $ 225 $ 316,368
Gen. Oblig., F.S.A. Aaa 7.683 7/01/20 1,000 (d) 978,750
Puerto Rico Elec. Pwr. Auth. Pwr. Rev. Baa1 6.125 7/01/09 785 813,542
Puerto Rico Ind. Tourist, Edl. Med. & Envir. Hosp.,
M.B.I.A. Aaa 6.25 7/01/24 1,250 1,277,350
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.763 1/16/15 1,000 (d) 907,500
Takoma Park Hosp. Facs. Rev., Ref. Impvt., Washington
Adventist Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,080,670
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund, Ser. A NR 7.25 10/01/18 600 632,976
Washington Cnty. Public Impvt., F.G.I.C. Aaa 4.875 1/01/14 1,450 (e) 1,286,208
Washington Suburban San. Dist.,
Gen. Construction Aa1 5.25 6/01/12 1,500 1,436,970
Water Supply Aa1 5.25 6/01/14 950 891,689
Water Supply Aa1 5.25 6/01/13 875 829,439
-----------
Total long-term investments (cost $35,547,405) 36,716,063
-----------
SHORT-TERM INVESTMENTS--6.6%
Maryland St. Energy Fin. Auth., Baltimore Proj., F.R.D.D.,
Ser. 91 VMIG1 3.55 9/01/95 700 700,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., F.R.W.D., Ser. 85 VMIG1 3.20 9/06/95 1,900 1,900,000
-----------
Total short-term investments (cost $2,600,000) 2,600,000
-----------
Total Investments--100.3%
(cost $38,147,405; Note 4) 39,316,063
Liabilities in excess of other assets--(0.3)% (124,391)
-----------
Net Assets--100% $39,191,672
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Pledged as initial margin on financial futures contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-93
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $38,147,405)..................................................................... $ 39,316,063
Cash......................................................................................................... 502,086
Interest receivable.......................................................................................... 557,284
Receivable for investments sold.............................................................................. 10,297
Receivable for Fund shares sold.............................................................................. 1,570
Other assets................................................................................................. 1,484
------------
Total assets............................................................................................... 40,388,784
------------
Liabilities
Payable for investments purchased............................................................................ 986,738
Payable for Fund shares reacquired........................................................................... 94,943
Accrued expenses............................................................................................. 62,300
Management fee payable....................................................................................... 14,951
Dividends payable............................................................................................ 13,896
Due to broker-variation margin............................................................................... 12,031
Distribution fee payable..................................................................................... 10,653
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities.......................................................................................... 1,197,112
------------
Net Assets................................................................................................... $ 39,191,672
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 36,754
Paid-in capital in excess of par........................................................................... 38,549,190
------------
38,585,944
Accumulated net realized loss on investments............................................................... (558,711)
Net unrealized appreciation on investments................................................................. 1,164,439
------------
Net assets, August 31, 1995.................................................................................. $ 39,191,672
------------
------------
Class A:
Net asset value and redemption price per share
($17,725,981 / 1,663,449 shares of beneficial interest issued and outstanding).......................... $10.66
Maximum sales charge (3.0% of offering price).............................................................. .33
Maximum offering price to public........................................................................... $10.99
Class B:
Net asset value, offering price and redemption price per share
($21,413,564 / 2,007,101 shares of beneficial interest issued and outstanding).......................... $10.67
Class C:
Net asset value, offering price and redemption price per share
($52,127 / 4,886 shares of beneficial interest issued and outstanding).................................. $10.67
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-94
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................... $ 2,833,827
---------------
Expenses
Management fee, net of waiver of $14,170... 210,311
Distribution fee--Class A.................. 11,341
Distribution fee--Class B.................. 167,486
Distribution fee--Class C.................. 437
Reports to shareholders.................... 82,000
Custodian's fees and expenses.............. 79,000
Registration fees.......................... 45,000
Transfer agent's fees and expenses......... 36,000
Audit fee.................................. 11,000
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 11,429
---------------
Total expenses.......................... 667,204
Less: custodian fee credit................. (19,273)
---------------
Net expenses............................ 647,931
---------------
Net investment income......................... 2,185,896
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on:
Investment transactions.................... (48,440)
Financial futures contract transactions.... (381,131)
---------------
(429,571)
---------------
Net change in unrealized
appreciation/depreciation of:
Investments................................ 481,333
Financial futures contracts................ (38,532)
---------------
442,801
---------------
Net gain on investments....................... 13,230
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,199,126
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income............ $ 2,185,896 $ 2,785,557
Net realized gain (loss) on
investment transactions....... (429,571) 658,135
Net change in unrealized
appreciation/depreciation of
investments................... 442,801 (4,715,895)
----------- -----------
Net increase (decrease) in net
assets resulting from
operations.................... 2,199,126 (1,272,203)
----------- -----------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A....................... (561,997) (149,002)
Class B....................... (1,621,246) (2,636,439)
Class C....................... (2,653) (116)
----------- -----------
(2,185,896) (2,785,557)
----------- -----------
Distributions from net realized
gains
Class A....................... (21,234) (53,117)
Class B....................... (419,138) (1,057,112)
Class C....................... (255) --
----------- -----------
(440,627) (1,110,229)
----------- -----------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares sold.... 2,121,739 5,404,805
Net asset value of shares issued
in reinvestment of dividends
and distributions............. 1,744,018 2,685,739
Cost of shares reacquired........ (18,256,314) (9,441,263)
----------- -----------
Net decrease in net assets from
Series share transactions..... (14,390,557) (1,350,719)
----------- -----------
Total decrease...................... (14,817,954) (6,518,708)
Net Assets
Beginning of year................... 54,009,626 60,528,334
----------- -----------
End of year......................... $39,191,672 $54,009,626
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-95
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Maryland Series (the ``Series'') commenced
investment operations in January, 1985. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts. The Series invests in financial
futures contracts in order to hedge its existing portfolio securities or
securities the Series intends to purchase, against fluctuations in value caused
by changes in prevailing interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's
- --------------------------------------------------------------------------------
B-96
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
performance of such services. PMF has entered into a subadvisory agreement with
The Prudential Investment Corporation (``PIC''); PIC furnishes investment
advisory services in connection with the management of the Fund. PMF pays for
the services of PIC, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $14,170
($0.004 per share for Class A, B and C shares; .03% of average net assets). The
Series' is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $3,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $134,200 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $25,900 for the services of PMFS. As
of August 31, 1995, approximately $2,100 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $20,811,030 and
$35,356,008, respectively.
At August 31, 1995, the Fund sold 25 financial futures contracts on the
Municipal Bond Index expiring in 1995. The value at disposition of such
contracts is $2,843,906. The value of such contracts on August 31, 1995 was
$2,848,125, thereby resulting in an unrealized loss of $4,219.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of August 31,
1995, net unrealized appreciation of investments for federal income tax purposes
is $1,168,658 (gross unrealized appreciation--$1,478,098; gross unrealized
depreciation $309,440).
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
- --------------------------------------------------------------------------------
B-97
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1994 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 30,696 $ 321,277
Shares issued in reinvestment of
dividends and distributions...... 36,276 380,528
Shares reacquired.................. (516,337) (5,397,762)
---------- ------------
Net decrease in shares outstanding
before conversion................ (449,365) (4,695,957)
Shares issued upon conversion from
Class B.......................... 1,858,567 19,167,920
---------- ------------
Net increase in shares
outstanding...................... 1,409,202 $ 14,471,963
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 74,702 $ 830,474
Shares issued in reinvestment of
dividends and distributions...... 12,858 143,277
Shares reacquired.................. (85,098) (937,854)
---------- ------------
Net increase in shares
outstanding...................... 2,462 $ 35,897
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 168,521 $ 1,765,335
Shares issued in reinvestment of
dividends and distributions...... 133,516 1,361,503
Shares reacquired.................. (1,235,993) (12,775,937)
---------- ------------
Net decrease in shares outstanding
before conversion................ (933,956) (9,649,099)
Shares reacquired upon conversion
into Class A..................... (1,856,766) (19,167,920)
---------- ------------
Net decrease in shares
outstanding...................... (2,790,722) $(28,817,019)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 399,067 $ 4,473,113
Shares issued in reinvestment of
dividends and distributions...... 228,006 2,542,431
Shares reacquired.................. (772,159) (8,503,409)
---------- ------------
Net decrease in shares
outstanding...................... (145,086) $ (1,487,865)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Amount
- ----------------------------------------- ------ --------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold.............................. 3,361 $35,127
Shares issued in reinvestment of
dividends and distributions............ 194 1,987
Shares reacquired........................ (8,221) (82,615 )
------ --------
Net decrease in shares outstanding....... (4,666) $(45,501)
------ --------
------ --------
August 1, 1994* through
August 31, 1994:
Shares sold.............................. 9,549 $101,218
Shares issued in reinvestment of
dividends.............................. 3 31
------ --------
Net increase in shares outstanding....... 9,552 $101,249
------ --------
------ --------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-98
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
Year Ended August 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............. $ 10.66 $ 11.64 $11.11 $10.67 $10.23
------- ------- ------ ------ ------
Income from investment operations
Net investment income.......................... .53(a) .57 .62 .63 .67
Net realized and unrealized gain (loss) on
investment transactions..................... .10 (.77) .65 .44 .44
------- ------- ------ ------ ------
Total from investment operations............ .63 (.20) 1.27 1.07 1.11
------- ------- ------ ------ ------
Less distributions
Dividends from net investment income........... (.53) (.57) (.62) (.63) (.67)
Distributions from net realized gains.......... (.10) (.21) (.12) -- --
------- ------- ------ ------ ------
Total distributions......................... (.63) (.78) (.74) (.63) (.67)
------- ------- ------ ------ ------
Net asset value, end of year................... $ 10.66 $ 10.66 $11.64 $11.11 $10.67
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):............................... 6.32% (1.75)% 11.89% 10.35% 10.84%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................. $17,726 $2,709 $2,930 $1,335 $804
Average net assets (000)....................... $11,341 $2,877 $2,068 $1,080 $518
Ratios to average net assets:
Expenses, including distribution fees....... 1.30%(a) .95% .96% .96% 1.10%
Expenses, excluding distribution fees....... 1.20%(a) .85% .86% .86% 1.00%
Net investment income....................... 4.96%(a) 5.18% 5.51% 5.80% 6.07%
Portfolio turnover rate........................ 49% 40% 41% 34% 18%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment of dividends
and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-99
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
------------------------------------------------------- Year
Year Ended August 31, Ended
------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
<S> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.67
------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income.......................... .49(a) .53 .58 .59 .63 .47(a)
Net realized and unrealized gain (loss) on
investment transactions..................... .10 (.77) .65 .44 .45 .10
------- ------- ------- ------- ------- ------
Total from investment operations............ .59 (.24) 1.23 1.03 1.08 .57
------- ------- ------- ------- ------- ------
Less distributions
Dividends from net investment income........... (.49) (.53) (.58) (.59) (.63) (.47)
Distributions from net realized gains.......... (.10) (.21) (.12) -- -- (.10)
------- ------- ------- ------- ------- ------
Total distributions......................... (.59) (.74) (.70) (.59) (.63) (.57)
------- ------- ------- ------- ------- ------
Net asset value, end of period................. $ 10.67 $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.67
------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------
TOTAL RETURN(b):............................... 5.88% (2.13)% 11.43% 9.90% 10.49% 5.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $21,414 $51,198 $57,598 $51,313 $51,110 $52
Average net assets (000)....................... $33,497 $55,223 $53,780 $50,970 $48,422 $58
Ratios to average net assets:
Expenses, including distribution fees....... 1.55%(a) 1.35% 1.36% 1.37% 1.49% 1.82%(a)
Expenses, excluding distribution fees....... 1.05%(a) .85% .86% .87% .99% 1.07%(a)
Net investment income....................... 4.84%(a) 4.77% 5.11% 5.42% 5.70% 4.55%(a)
Portfolio turnover rate........................ 49% 40% 41% 34% 18% 49%
<CAPTION>
August 1,
through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 10.70
----------
Income from investment operations
Net investment income.......................... .05
Net realized and unrealized gain (loss) on
investment transactions..................... (.03)
----------
Total from investment operations............ .02
----------
Less distributions
Dividends from net investment income........... (.05)
Distributions from net realized gains.......... --
----------
Total distributions......................... (.05)
----------
Net asset value, end of period................. $ 10.67
----------
----------
TOTAL RETURN(b):............................... .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $102
Average net assets (000)....................... $31
Ratios to average net assets:
Expenses, including distribution fees....... 2.21%(c)
Expenses, excluding distribution fees....... 1.47%(c)
Net investment income....................... 4.75%(c)
Portfolio turnover rate........................ 40%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-100
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MARYLAND SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Maryland Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Maryland
Series as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Maryland Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
NEW YORK, NEW YORK
OCTOBER 16, 1995
B-101
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--94.4%
- ------------------------------------------------------------------------------------------------------------------------------
Boston Ind. Dev. Fin. Auth., Swr. Fac. Rev., Harbor Elec.
Energy Co. Proj. Baa1 7.375% 5/15/15 $ 1,500 $ 1,576,500
Boston Mass., Gen. Oblig., Ser. A, A.M.B.A.C. Aaa 7.375 2/01/10 2,000 2,263,320
Boston Mass. Rev., Boston City Hosp., FHA Aa 5.75 2/15/23 2,000 1,874,400
Brockton Mass. Baa 6.125 6/15/18 1,030 1,029,876
Gloucester Mass., Gen. Oblig., F.S.A. Aaa 5.50 11/15/13 2,000 1,930,700
Holyoke, Gen. Oblig., Sch. Proj., M.B.I.A. Aaa 8.10 6/15/05 700 839,006
Lowell, Gen. Oblig. Aaa 7.625 2/15/10 750(d) 877,485
Lynn Wtr. & Swr. Comn., Gen. Rev., Ser. A, M.B.I.A. Aaa 7.25 12/01/10 2,100(d) 2,403,597
Mass. St. Gen. Oblig., Ser. A A1 Zero 8/01/06 665 381,717
Ser. C, F.G.I.C. Aaa 6.00 8/01/09 1,500 1,590,195
Gen. Oblig., A.M.B.A.C. Aaa 5.00 7/01/12 1,000 920,720
Mass. St. Hlth. & Edl. Fac. Auth. Rev.,
Beth Israel Hosp. A.M.B.A.C Aaa 8.218 7/01/25 1,500(e) 1,477,500
Dana Farber Cancer Project Series G/1 A1 6.25 12/01/22 625 617,663
Faulkner Hosp., Ser. C Baa1 6.00 7/01/23 1,500 1,317,105
Holyoke Hosp. Rev. Baa1 6.50 7/01/15 1,500 1,430,835
Jordan Hosp. A-(c) 6.875 10/01/22 1,850 1,894,345
Lahey Clinic, Ser. B, M.B.I.A. Aaa 5.375 7/01/23 450 413,829
Med Academic Scientific A A-(c) 6.625 1/01/15 1,000 1,013,800
New England Med. Ctr., Ser. E A1 7.875 7/01/11 1,175 1,308,656
Newton-Wellesley Hosp., M.B.I.A. Aaa 5.875 7/01/15 1,000 985,520
Newton-Wellesley Hosp., M.B.I.A. Aaa 6.00 7/01/18 1,000 994,980
Newton-Wellesley Hosp., Ser. C, B.I.G. Aaa 8.00 7/01/18 2,000 2,233,540
Tufts Univ., Ser. C Aaa 7.40 8/01/18 1,235(d) 1,367,478
Valley Regl. Hlth. Sys., Ser. B Aaa 8.00 7/01/18 1,000(d) 1,167,980
Valley Regl. Hlth. Sys. AAA(c) 7.00 7/01/10 825 930,435
Winchester Hosp. AAA(c) 5.75 7/01/24 2,000 1,877,040
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-102
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Mass. St. Hsg. Fin. Agcy. Rev.,
Sngl. Fam. Mtge., Ser. 1985A Aa 9.50% 12/01/16 $ 415 $ 429,508
Sngl. Fam. Mtge., Ser. 6 Aa 8.10 12/01/14 1,755 1,896,699
Mass. St. Ind. Fin. Agcy. Rev.,
Brooks Sch. A 5.95 7/01/23 640 632,211
Cape Cod Hlth. Sys. Aaa 8.50 11/15/20 2,000 2,402,200
Springfield College Baa1 5.625 9/15/10 900 829,152
Mass. St. Industrial Fin. Agcy. Rev. Phillips Academy Aa1 5.375 9/01/23 1,000 920,800
Mass. St. Indl. Fin. Agcy., Poll. Ctrl. Rev., Eastern
Edison Co. Proj. Baa2 5.875 8/01/08 1,000 991,470
Mass. St. Port Auth. Rev. Aa 5.00 7/01/18 1,000 884,380
Mass. St. Mun. Wholesale Ele. Co. Pwr. Supply Sys. Rev. Aaa 5.00 7/01/14 1,500 1,349,175
Mass. St. Water Poll. Abatement Trust Water Poll. Rev. Aa 6.375 2/01/15 1,000 1,028,670
Palmer, Gen. Oblig., Ser. F, A.M.B.A.C. Aaa 7.30 3/01/10 500 (d) 565,295
Plymouth Cnty. Corr. Facs. Proj., Cert. of Part., Ser. A A-(c) 7.00 4/01/22 500 544,430
Puerto Rico Aqueduct & Swr. Auth. Rev., E.T.M. Aaa 10.25 7/01/09 400 562,432
Puerto Rico Comnwlth.,
Gen. Oblig. Baa1 5.25 7/01/18 1,000 899,290
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 1,000 1,160,650
Gen. Oblig., F.S.A. Aaa 7.723 7/01/20 1,250 (e) 1,223,437
Pub. Impvt. Ref. Aaa 7.00 7/01/10 250 290,163
Puerto Rico Elec. Pwr. Auth. Rev. Ser. S Baa1 7.00 7/01/06 450 507,632
Puerto Rico Ele. Pwr. Auth. Rev. (Formerly Puerto Rico
Comnwlth. Water Res. Auth. Pwr. Rev.) Baa1 6.125 7/01/09 500 518,180
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund, Ser. A NR 7.25 10/01/18 400 421,984
-----------
Total long-term investments (cost $48,941,217) 52,775,980
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-103
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--8.2%
Mass. Comnwlth., Ded. Inc.Tax, F.R.D.D., Ser. 90B VMIG1 3.20% 9/01/95 $ 2,900 $ 2,900,000
Mass. Ind. Fin. Agcy. Ind. Rev., Showa Womens Inst. Inc.,
F.R.D.D.,
Ser. 94 VMIG1 3.40 9/01/95 1,000 1,000,000
Puerto Rico Comnwlth., Dev. Bank., F.R.W.D., Ser. 85 VMIG1 3.20 9/06/95 700 700,000
-----------
Total short-term investments (cost $4,600,000) 4,600,000
-----------
Total Investments--102.6%
(cost $53,541,217; Note 4) 57,375,980
Other assets in excess of liabilities--(2.6)% (1,470,047)
-----------
Net Assets--100% $55,905,933
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance
Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.H.A.--Federal Housing Administration.
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity date of these securities are considered to be the later of the next
date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted.
(c) Standard & Poor's rating.
(d) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
</TABLE>
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-104
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $53,541,217)...................................................................... $57,375,980
Interest receivable........................................................................................... 684,875
Deferred expenses and other assets............................................................................ 2,214
-----------
Total assets............................................................................................... 58,063,069
-----------
Liabilities
Bank overdraft................................................................................................ 103,004
Payable for investments purchased............................................................................. 1,951,233
Payable for Fund shares reacquired............................................................................ 30,015
Dividends payable............................................................................................. 29,425
Due to Manager................................................................................................ 21,155
Due to Distributors........................................................................................... 14,341
Accrued expenses.............................................................................................. 6,363
Deferred trustees' fees....................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 2,157,136
-----------
Net Assets.................................................................................................... $55,905,933
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 48,077
Paid-in capital in excess of par........................................................................... 52,152,628
-----------
52,200,705
Accumulated net realized loss on investments............................................................... (129,535)
Net unrealized appreciation on investments................................................................. 3,834,763
-----------
Net assets, August 31, 1995................................................................................... $55,905,933
-----------
-----------
Class A:
Net asset value and redemption price per share
($27,524,632 / 2,366,271 shares of beneficial interest issued and outstanding).......................... $11.63
Maximum sales charge (3% of offering price)................................................................ .36
-----------
Maximum offering price to public........................................................................... $11.99
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($28,366,921 / 2,440,169 shares of beneficial interest issued and outstanding).......................... $11.62
-----------
-----------
Class C:
Net asset value, offer price and redemption price per share
($14,380 / 1,237 shares of beneficial interest issued and outstanding).................................. $11.62
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-105
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 3,685,338
---------------
Expenses
Management fee, net of waiver of
$18,492............................... 258,040
Distribution fee--Class A................ 15,837
Distribution fee--Class B................ 197,277
Distribution fee--Class C................ 104
Custodian's fees and expenses............ 85,000
Transfer agent's fees and expenses....... 38,000
Reports to shareholders.................. 27,400
Registration fees........................ 20,500
Audit fee................................ 11,000
Legal fees............................... 21,000
Trustees' fees........................... 3,200
Miscellaneous............................ 8,867
---------------
Total expenses........................ 686,225
Less: custodian fee credit............ (3,722)
---------------
Net expenses.......................... 682,503
---------------
Net investment income....................... 3,002,835
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 327,609
Financial futures contract
transactions.......................... (20,626)
Options purchased........................ (12,625)
---------------
294,358
---------------
Net change in unrealized appreciation on:
Investments.............................. 871,511
---------------
Net gain on investments..................... 1,165,869
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,168,704
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------- -------
<S> <C> <C>
Operations
Net investment income............ $ 3,002,835 $ 3,240,965
Net realized gain (loss) on
investment transactions....... 294,358 (262,240)
Net change in unrealized
appreciation/depreciation of
investments................... 871,511 (3,647,136)
----------- -----------
Net increase (decrease) in net
assets resulting from
operations.................... 4,168,704 (668,411)
----------- -----------
Dividends and distributions (Note 1):
Dividends from net investment
income
Class A....................... (884,881) (144,412)
Class B....................... (2,117,251) (3,096,493)
Class C....................... (703) (60)
----------- -----------
(3,002,835) (3,240,965)
----------- -----------
Distributions from net realized
gains
Class A....................... -- (16,934)
Class B....................... -- (376,754)
----------- -----------
-- (393,688)
----------- -----------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares sold.... 3,105,413 7,355,596
Net asset value of shares issued
in reinvestment of
dividends..................... 1,755,219 2,173,313
Cost of shares reacquired........ (7,833,814) (10,958,113)
----------- -----------
Net decrease in net assets from
Series share transactions..... (2,973,182) (1,429,204)
----------- -----------
Total decrease...................... (1,807,313) (5,732,268)
Net Assets
Beginning of year................... 57,713,246 63,445,514
----------- -----------
End of year......................... $55,905,933 $57,713,246
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-106
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Series (the ``Series'')
commenced investment operations in September, 1984. The Series is diversified
and seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from securities or currencies based upon the type of option
written. The difference between the premium and the amount paid on effecting a
closing purchase transaction, including brokerage commissions, is also treated
as a realized gain, or if the premium received is less than the amount paid for
the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities or currencies purchased by the Fund. The Fund as writer of an option
may have no control over whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an unfavorable change
in the price of the security underlying the written option. There were no
written options outstanding at August 31, 1995.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code
- --------------------------------------------------------------------------------
B-107
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason and because substantially all of the
Series' gross income consists of tax-exempt interest, no federal income tax
provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
short-term capital gains and market discount.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''). PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $18,492
($0.003 per share; .03% of average net assets). The Series is not required to
reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $6,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $69,000 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended August 31,
1995, the Series incurred fees of approximately $24,500 for the services of
PMFS. As of August 31, 1995, approximately $2,200 of such fees were due to PMFS.
Transfer agent fees and expenses in the statement of operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995, were $19,262,334 and
$23,901,769, respectively.
The cost basis of investments for federal income tax purposes, at August 31,
1995, was $53,650,045 and, accordingly, net unrealized appreciation of
investments, including short-term investments for federal income tax purposes
was $3,725,935 (gross unrealized appreciation--$3,855,820, gross unrealized
depreciation--$129,885).
- --------------------------------------------------------------------------------
B-108
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
The Fund will elect to treat net capital losses of approximately $975,100
incurred in the ten month period ended August 31, 1995 as having been incurred
in the following fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 32,229 $ 365,268
Shares issued in reinvestment of
dividends......................... 44,959 516,523
Shares reacquired................... (153,318) (1,754,945)
---------- ------------
Net decrease in shares outstanding
before conversion................. (76,130) (873,154)
Shares issued upon conversion from
Class B........................... 2,240,731 25,201,555
---------- ------------
Net increase in shares
outstanding....................... 2,164,601 $ 24,328,401
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 79,658 $ 955,193
Shares issued in reinvestment of
dividends and distributions....... 7,338 86,177
Shares reacquired................... (76,352) (888,834)
---------- ------------
Net increase in shares
outstanding....................... 10,644 $ 152,536
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 241,751 $ 2,725,137
Shares issued in reinvestment of
dividends......................... 111,056 1,237,961
Shares reacquired................... (546,923) (6,076,741)
---------- ------------
Net decrease in shares outstanding
before conversion................. (194,116) (2,113,643)
Shares reacquired upon conversion
into Class A...................... (2,242,679) (25,201,555)
---------- ------------
Net decrease in shares
outstanding....................... (2,436,795) $(27,315,198)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 533,589 $ 6,293,496
Shares issued in reinvestment of
dividends and distributions....... 177,548 2,087,119
Shares reacquired................... (857,454) (9,963,041)
---------- ------------
Net decrease in shares
outstanding....................... (146,317) $ (1,582,426)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 1,340 $ 15,008
Shares issued in reinvestment of
dividends......................... 65 735
Shares reacquired................... (187) (2,128)
---------- ------------
Net increase in shares
outstanding....................... 1,218 $ 13,615
---------- ------------
---------- ------------
August 1, 1994* through August 31,
1994:
Shares sold......................... 9,403 $ 106,907
Shares issued in reinvestment of
dividends......................... 1 17
Shares reacquired................... (9,385) (106,238)
---------- ------------
Net increase in shares
outstanding....................... 19 $ 686
---------- ------------
---------- ------------
- ---------------
* Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-109
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.............. $ 11.37 $12.17 $11.50 $10.94 $10.44
------- ------ ------ ------ ------
Income from investment operations
Net investment income........................... .65(a) .67 .68 .69 .70
Net realized and unrealized gain (loss) on
investment transactions...................... .26 (.73) .67 .56 .50
------- ------ ------ ------ ------
Total from investment operations............. .91 (.06) 1.35 1.25 1.20
------- ------ ------ ------ ------
Less distributions
Dividends from net investment income............ (.65) (.67) (.68) (.69) (.70)
Distributions from net realized gains........... -- (.07) -- -- --
------- ------ ------ ------ ------
Total distributions.......................... (.65) (.74) (.68) (.69) (.70)
------- ------ ------ ------ ------
Net asset value, end of year.................... $ 11.63 $11.37 $12.17 $11.50 $10.94
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):................................ 8.33% (.58)% 12.10% 11.76% 11.81%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................... $27,525 $2,293 $2,325 $ 903 $ 665
Average net assets (000)........................ $15,837 $2,578 $1,336 $ 770 $ 344
Ratios to average net assets:
Expenses, including distribution fees........ .97%(a) .87% .95% .99% 1.05%
Expenses, excluding distribution fees........ .87%(a) .77% .85% .89% .95%
Net investment income........................ 5.59%(a) 5.60% 5.79% 6.14% 6.53%
Portfolio turnover rate......................... 36% 33% 56% 32% 34%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-110
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
----------
Class B Year Ended
------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
------- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $ 11.36 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $11.36
------- ------- ------- ------- ------- -------
Income from investment operations
Net investment income........................... .60(a) .61 .63 .64 .65 .57(a)
Net realized and unrealized gain (loss) on
investment transactions...................... .26 (.74) .68 .55 .50 .26
------- ------- ------- ------- ------- -------
Total from investment operations............. .86 (.13) 1.31 1.19 1.15 .83
------- ------- ------- ------- ------- -------
Less distributions
Dividends from net investment income............ (.60) (.61) (.63) (.64) (.65) (.57)
Distributions from net realized gains........... -- (.07) -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions.......................... (.60) (.68) (.63) (.64) (.65) (.57)
------- ------- ------- ------- ------- -------
Net asset value, end of period.................. $ 11.62 $ 11.36 $ 12.17 $ 11.49 $ 10.94 $11.62
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
TOTAL RETURN(b):................................ 7.90% (1.15)% 11.77% 11.23% 11.38% 7.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................. $28,367 $55,420 $61,121 $53,449 $49,641 $ 14
Average net assets (000)........................ $39,455 $59,544 $55,965 $50,607 $49,083 $ 14
Ratios to average net assets:
Expenses, including distribution fees........ 1.34%(a) 1.27% 1.35% 1.39% 1.45% 1.60%(a)
Expenses, excluding distribution fees........ .84%(a) .77% .85% .89% .95% .85%(a)
Net investment income........................ 5.37%(a) 5.20% 5.39% 5.74% 6.13% 5.07%(a)
Portfolio turnover rate......................... 36% 33% 56% 32% 34% 36%
<CAPTION>
August 1,
1994(d)
through
August 31,
1994
<S> <C>
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............ $11.41
-----
Income from investment operations
Net investment income........................... .04
Net realized and unrealized gain (loss) on
investment transactions...................... (.05)
-----
Total from investment operations............. (.01)
-----
Less distributions
Dividends from net investment income............ (.04)
Distributions from net realized gains........... --
-----
Total distributions.......................... (.04)
-----
Net asset value, end of period.................. $11.36
-----
-----
TOTAL RETURN(b):................................ (0.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................. $ 216(e)
Average net assets (000)........................ $ 15(e)
Ratios to average net assets:
Expenses, including distribution fees........ 1.57%(c)
Expenses, excluding distribution fees........ .82%(c)
Net investment income........................ 5.06%(c)
Portfolio turnover rate......................... 33%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Amounts are actual and not rounded to the nearest thousand.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-111
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Massachusetts
Series, as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Massachusetts Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-112
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--102.4%
- ------------------------------------------------------------------------------------------------------------------------------
Boston Wtr. & Swr. Comn.,
Ser. 85A, F.R.W.D. VMIG1 3.40% 9/06/95 $ 400 $ 400,000
Ser. 94A, F.R.W.D. VMIG1 3.45 9/07/95 2,400 2,400,000
Dist. of Columbia, Gen. Oblig., Ser. 92A-3, F.R.D.D. VMIG1 3.70 9/01/95 600 600,000
Greenfield Mass. Unlimited Tax Gen. Oblig., Ser. 91 Aaa 8.00 10/15/95 725 727,578
Gulf Coast Ind. Dev. Auth., Citgo Petroleum, Ser. 95,
F.R.D.D. VMIG1 3.70 9/01/95 400 400,000
Holyoke Poll. Ctrl. Rev., Ser. 88, F.R.W.D. A-1+* 3.40 9/06/95 700 700,000
Jackson County Miss. Ind. Swg. Facs. Rev., Chevron Inc.
Project, Ser. 94, F.R.D>D. P1 3.65 9/01/95 2,200 2,200,000
Marlborough Mass., B.A.N NR 3.75 2/29/96 2,000 2,002,336
Mass. Bay Trans. Auth.,
Ser. A, T.E.C.P. P1 3.75 9/15/95 1,500 1,500,000
Ser. B, Notes MIG2 5.00 9/08/95 250 250,050
Ser. C, T.E.C.P. A-1+* 3.85 10/13/95 1,000 1,000,000
Ser. 84A, S.E.M.O.T. VMIG1 3.75 3/01/96 1,000 1,000,000
Mass. Comnwlth., Ded. Inc.Tax, Ser., 90B, F.R.D.D. VMIG1 3.20 9/01/95 1,350 1,350,000
Mass. Edl. Loan & Auth., Ser. 95A, F.R.W.D. NR 3.15 9/06/95 1,500 1,500,000
Mass. Hlth. & Edl. Facs. Auth. Rev.,
Boston Univ. Ser. 85H, T.E.C.P. VMIG1 3.70 9/07/95 2,000 2,000,000
Cap. Asset Prog., Ser. D, F.R.W.D. VMIG1 3.35 9/06/95 2,000 2,000,000
Cap. Asset Prog., Ser. 85B, F.R.D.D. VMIG1 3.35 9/01/95 500 500,000
Cap. Asset Prog., Ser. 85C, F.R.D.D. VMIG1 3.35 9/01/95 1,500 1,500,000
Harvard Univ., Ser. 85 Aaa 8.75 12/01/95 1,000(d) 1,013,003
Harvard Univ., Ser. 89L, T.E.C.P. VMIG1 3.50 10/20/95 1,000 1,000,000
Mass. Hsg. Fin. Agcy. Rev.,
Ser. 94A, F.R.W.D. NR 3.65 9/07/95 1,000 1,000,000
Sngl. Fam. Hsg. Rev. Bds., Ser. 5, Q.T.R.O.T. Aaa 3.80 12/01/95 975 975,000
Sngl. Fam. Hsg. Rev. Bds., F.R.W.D. NR 3.65 9/07/95 960 960,000
Mass. Ind. Fin. Agcy. Ind. Rev.,
Riverdale Mills, Ser. 95, F.R.W.D. NR 3.70 9/07/95 1,500 1,500,000
New England Deaconess Proj., Ser. 93B, F.R.W.D. VMIG1 3.15 9/06/95 300 300,000
New England Pwr. Co., Ser. 93A, T.E.C.P. VMIG1 3.80 12/06/95 2,200 2,200,000
Ocean Spray Cranberry, A.O.T. NR 4.30 10/15/95 1,700 1,700,000
Showa Womens Inst. Inc., Ser. 94, F.R.D.D. VMIG1 3.40 9/01/95 4,350 4,350,000
United Med. Corp., Ser. 92 F.R.W.D. P1 3.55 9/06/95 800 800,000
Mass. Ind. Fin. Agcy. Res. Rec. Rev., Ogden Haverhill
Proj., Ser. 92A, F.R.W.D. VMIG1 3.25 9/06/95 1,000 1,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-113
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Mass. Mun. Whsl. Elec. Co., Pwr. Supply Sys. Rev., Ser.
94C, F.R.W.D. VMIG1 3.50% 9/06/95 $ 1,500 $ 1,500,000
Mass. Port Auth. Rev., Multi Modal, Ser. 95B, F.R.D.D. VMIG1 3.35 9/01/95 3,300 3,300,000
Mass. Wtr. Res. Auth., T.E.C.P. P1 3.55 9/27/95 1,100 1,100,000
Mass. Wtr. Res. Auth., T.E.C.P. P1 3.60 10/27/95 1,000 1,000,000
Peabody Mass., Ser. 95 Aa1 5.40 7/15/96 650 659,156
Puerto Rico Comnwlth.,
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+* 4.10 9/08/95 1,000 1,000,000
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+* 3.60 9/11/95 1,000 1,000,000
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+* 3.50 10/05/95 1,000 1,000,000
Puerto Rico Ind. Med. & Environ. Facs.,
Inter Amer. Proj., Ser. 88, T.E.C.P. VMIG1 3.65 10/06/95 300 300,000
Reynolds Metal Co. Proj., Ser. 83A, A.O.T. P1 3.75 9/01/96 2,000 1,995,140
Schering-Plough Corp., Ser. 83A, A.O.T. Aa3 4.35 12/01/95 2,000 1,998,070
Puerto Rico Public Bldgs. Auth. Rev., Ser. 34, F.R.W.D. A-1+* 3.60 9/07/95 1,000 1,000,000
Revere Hsg. Auth., Multifamily Mtge. Rev., Waters Edge
Proj., Ser. 91C, F.R.W.D. A-1* 3.90 9/01/95 1,990 1,990,000
St. Lucie Co., Ser. 93, T.E.C.P. VMIG1 3.65 10/30/95 1,500 1,500,000
-----------
Total Investments--102.4%
(amortized cost-$58,170,333(c)) 58,170,333
Liabilities in excess of other assets--(2.4)% (1,348,520)
-----------
Net Assets--100% $56,821,813
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.O.T.--Annual Optional Tender
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b)
F.R.W.D.--Floating Rate (Weekly) Demand Note (b)
Q.T.R.O.T.--Quarterly Tax & Reserve Optional Tender
S.E.M.O.T.--Semi-Monthly Tender Offer
T.E.C.P.--Tax-Exempt Commercial Paper
(b) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(c) The cost of securities for federal income tax purposes is substantially
the same as for financial reporting purposes.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
* Standard & Poor's rating.
NR--Not Rated by Moody's or Standard and Poor's ratings.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-114
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value................................................ $58,170,333
Cash.......................................................................................................... 32,360
Receivable for investments sold............................................................................... 3,327,006
Interest receivable........................................................................................... 295,385
Receivable for Fund shares sold............................................................................... 120,839
Deferred expenses and other assets............................................................................ 11,723
-----------
Total assets............................................................................................... 61,957,646
-----------
Liabilities
Payable for investments purchased............................................................................. 3,979,646
Payable for Fund shares reacquired............................................................................ 1,076,102
Accrued expenses.............................................................................................. 44,569
Dividends payable............................................................................................. 24,245
Management fee payable........................................................................................ 6,256
Distribution fee payable...................................................................................... 3,415
Deferred Trustees' fees....................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 5,135,833
-----------
Net Assets.................................................................................................... $56,821,813
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value........................................................... $ 568,218
Paid-in capital in excess of par........................................................................... 56,253,595
-----------
Net assets, August 31, 1995................................................................................... $56,821,813
-----------
-----------
Net asset value, offering price and redemption price per share ($56,821,813 / 56,821,813 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)......................... $1.00
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-115
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 1,594,584
---------------
Expenses
Management fee, net of waiver of
$160,946.............................. 53,649
Distribution fee......................... 53,649
Custodian's fees and expenses............ 65,000
Transfer agent's fees and expenses....... 27,000
Reports to shareholders.................. 17,000
Registration fees........................ 15,000
Amortization of organization expenses.... 12,151
Audit fee................................ 10,500
Legal fees............................... 10,000
Trustees' fees........................... 3,200
Miscellaneous............................ 1,983
---------------
Total expenses........................ 269,132
Less: custodian fee credit.................. (23,554)
---------------
Net expenses.......................... 245,578
---------------
Net investment income....................... 1,349,006
---------------
Realized Loss on investments
Net realized loss on investment
transactions............................. (663)
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 1,348,343
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income........ $ 1,349,006 $ 789,061
Net realized loss on
investment transactions... (663) --
------------- -------------
Net increase in net assets
resulting from
operations................ 1,348,343 789,061
------------- -------------
Dividends to shareholders (Note
1)........................... (1,348,343) (789,061)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold...................... 209,358,640 147,907,523
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 1,276,924 757,067
Cost of shares reacquired.... (191,091,855) (147,994,192)
------------- -------------
Net increase in net assets
from Series share
transactions.............. 19,543,709 670,398
------------- -------------
Total increase.................. 19,543,709 670,398
Net Assets
Beginning of year............... 37,278,104 36,607,706
------------- -------------
End of year..................... $ 56,821,813 $ 37,278,104
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-116
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Money Market Series (the
``Series'') commenced investment operations on August 5, 1991. The Series is
non-diversified and seeks to provide the highest level of income that is exempt
from Massachusetts State, local and federal income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities having a
maturity of thirteen months or less and whose ratings are within the two highest
ratings categories by a nationally recognized statistical rating organization,
or if not rated, are of comparable quality. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
Deferred Organization Expenses: The Series incurred approximately $51,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending July 1996.
Custody Fee Credits: The Series has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. For the fiscal
year ended August 31, 1995, PMF voluntarily waived 75% of its management fee.
The amount of fees waived for the fiscal year ended August 31, 1995 amounted to
$160,946 ($.003 per share; .375% of average net assets).
The Fund has a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''). To reimburse PMFD for its expenses incurred pursuant to a plan
of distribution, the Fund pays PMFD a reimbursement, accrued daily and payable
monthly, at an annual rate of .125 of 1% of the Series' average daily net
assets. PMFD pays various broker-dealers, including Prudential Securities
Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $24,000 for the services of PMFS. As
of August 31, 1995, approximately $1,900 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also includes certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-117
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 5,
1991(a)
Year Ended August 31, through
------------------------------------------- August 31,
1995 1994 1993 1992 1991
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized gains(c)................. .031 .019 .021 .034 .003
Dividends and distributions to shareholders................. (.031) (.019) (.021) (.034) (.003)
------- ------- ------- ------- -----
Net asset value, end of period.............................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -----
------- ------- ------- ------- -----
TOTAL RETURN(d):............................................ 3.10% 1.89% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $56,822 $37,278 $36,608 $18,019 $6,365
Average net assets (000).................................... $42,919 $42,427 $32,246 $15,477 $3,200
Ratio to average net assets:(c)
Expenses, including distribution fee..................... .627% .620% .365% .125% .125%(b)
Expenses, excluding distribution fee..................... .502% .495% .240% .00% .00%(b)
Net investment income.................................... 3.14% 1.86% 2.11% 3.20% 4.46%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of management fee waiver and expense subsidy.
(d) Total return includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-118
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Massachusetts Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Massachusetts
Money Market Series, as of August 31, 1995, the related statements of operations
for the year then ended and of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the four
years in the period then ended and for the period August 5, 1991 (commencement
of investment operations) through August 31, 1991. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Massachusetts Money Market Series, as of August 31, 1995, the
results of its operations, the changes in its net assets, and its financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-119
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--96.7%
- ------------------------------------------------------------------------------------------------------------------------------
Adams Twnshp. Sch. Dist. Rev., Gen. Oblig., A.M.B.A.C. Aaa 6.60% 5/01/24 $ 1,000 $ 1,053,750
Arpt. Michigan Comm. Sch. Dist., A.M.B.A.C. Aaa 5.125 5/01/22 1,535 1,377,877
Breitung Twnshp. Sch. Dist. Rev., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 257,363
Canton Charter Twnshp. Bldg. Auth.,
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/11 450 398,214
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/12 450 393,610
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/13 500 432,205
Wayne Cnty. Golf Course, F.S.A. Aaa 4.75 1/01/14 500 430,530
Central Michigan Univ. Rev. A 7.00 10/01/10 700 (b) 789,509
Chippewa Valley Sch. Dist., F.G.I.C. Aaa 5.00 5/01/21 2,400 2,118,888
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A, F.S.A. Aaa 6.875 5/01/09 1,000 1,078,730
Detroit Wtr. Supply Sys. Rev.,
F.G.I.C. Aaa 4.75 7/01/19 1,000 843,610
F.G.I.C. Aaa 5.00 7/01/23 1,250 1,098,550
Detroit Sewage Disp. Rev., F.G.I.C. Aaa 5.70 7/01/23 2,000 1,895,860
Detroit St. Aid, Gen. Oblig. Baa 5.625 5/01/97 1,500 1,523,325
Dickinson Cnty., Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,013,800
Ferris St. Univ. Gen. Rev., A.M.B.A.C. Aaa 5.80 10/01/05 440 467,949
Grand Rapids San. Swr. Sys. Rev. A1 7.00 1/01/16 500 533,925
Guam Pwr. Auth. Rev., Ser. A BBB(e) 6.625 10/01/14 1,000 1,024,770
Holland Sch. Dist., A.M.B.A.C. Aaa Zero 5/01/15 2,400 732,648
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 1,487,500
Jackson Cnty., Hosp. Fin. Auth. Rev., Ser. A, F.G.I.C. Aaa 5.25 6/01/23 1,500 1,350,555
Kent Hosp. Fac. Fin. Auth. Rev., Blodgette Mem. Med. Ctr.,
Ser. A A 7.25 7/01/05 500 540,100
Lincoln Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 5.80 5/01/14 500 494,335
Michigan Higher Ed., Student Loan Auth. Rev., Ser. XIII-A,
M.B.I.A. Aaa 7.55 10/01/08 500 546,875
Michigan Pub. Pwr. Agcy. Rev.,
Belle River Proj., Ser. A A1 5.25 1/01/18 1,250 1,132,500
Belle River Proj. A1 5.00 1/01/19 1,000 870,670
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A Baa1 8.25 7/01/12 2,000 2,136,180
Henry Ford Hosp. Aaa 9.00 5/01/08 2,340 2,961,130
Hosp. Genesys Hlth. Sys. Baa 8.125 10/01/21 1,000 1,074,550
Hosp. Genesys Hlth. Sys. Baa 7.50 10/01/27 500 510,930
Hosp. Pontiac Osteopathic, Ser. A Baa1 6.00 2/01/24 900 785,583
McLaren Obligated Group, Ser. A Aaa 7.50 9/15/21 800(b) 935,104
Oakwood Hosp. Obligated Group, F.G.I.C. Aaa 6.95 7/01/02 1,000(b)(c) 1,123,260
Sisters of Mercy, Ser. H, M.B.I.A. Aaa 7.50 8/15/07 2,000 2,179,100
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-120
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan St. Hsg. Dev. Auth. Rev.,
Multifamily Mtge. Insured Hsg., Ser. A A+(e) 7.15% 4/01/10 $ 1,000 $ 1,057,640
Multifamily Mtge. Insured Hsg., Ser. A A+(e) 7.70 4/01/23 500 532,010
Sngl. Fam. Mtge., Ser. A AA(e) 7.70 12/01/16 370 397,361
Michigan St. Strategic Fund Ltd. Obligated Rev.,
Waste Mgmt. Inc. Proj. A1 6.625 12/01/12 2,000 2,066,000
Michigan St. Trunk Line Hwy.,
Ser. A, A.M.B.A.C. Aaa Zero 10/01/05 2,600 1,534,234
Ser. A, A.M.B.A.C. Aaa Zero 10/01/06 1,250 691,012
Michigan St. Univ. Rev., Ser. A A1 5.50 8/15/22 640 590,278
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., F.G.I.C. Aaa 7.65 9/01/20 2,000 2,248,940
Mt. Pleasant Wtr. Rev., Wtr. & Swr.,
M.B.I.A. Aaa 5.00 2/01/22 520 458,354
M.B.I.A. Aaa 4.00 2/01/23 550 401,715
M.B.I.A. Aaa 4.00 2/01/24 585 425,061
Oak Park, Gen. Oblig.,
A.M.B.A.C. Aaa 7.00 5/01/11 375(b) 429,128
A.M.B.A.C. Aaa 7.00 5/01/12 400(b) 457,736
Oakland Cnty., Leuders Drainage Dept., A.M.B.A.C. Aaa 5.50 5/01/09 350 348,971
Oakland Univ. Rev., Gen. Oblig., M.B.I.A. Aaa 5.75 5/15/26 1,400 1,358,644
Posen Cons. Sch. Dist., Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000 1,076,060
Puerto Rico Commonwlth. Hwy. Auth. Rev.,
Ser. Q Baa1 7.75 7/01/16 1,500(b) 1,742,595
M.B.I.A. Aaa 5.782 7/01/08 2,000 2,068,460
Puerto Rico Elec. Pwr. Auth. Rev., Ser. N Baa1 7.125 7/01/14 920 992,395
Puerto Rico Ind., Tourist, Edu., Med. & Envir. Ctrl. Facs.,
Hosp. Auxilio Mutuo Oblig. Grp. A, M.B.I.A. Aaa 6.25 7/01/24 1,000 1,021,880
Saginaw Valley St. Univ. Gen. Rev., M.B.I.A. Aaa 5.375 7/01/16 790 744,172
St. Clair Cnty., Wtr. Supply Sys. No. VII, IRA Township,
A.M.B.A.C. Aaa 5.25 7/01/15 1,000 901,820
Tri-Cnty. Area Schs., Gen. Oblig., F.G.I.C. Aaa 5.25 5/01/20 2,000 1,834,400
Univ. of Michigan Major Cap. Proj. Rev. Aa1 5.50 4/01/13 355 341,446
Univ. of Michigan Rev.,
Pkg. Sys. Rfdg. Aa 5.00 6/01/15 500 445,195
Virgin Islands Pub. Fin. Auth. Rev., Matching Loan Notes,
Ser. A NR 7.25 10/01/18 500 527,480
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 500 531,620
Warren Cons. Sch. Dist., Consolidated Sch. Dist., Ser. II,
F.G.I.C. Aaa 5.25 5/01/21 1,000 915,740
Wayne Cnty. Arpt. Rev., M.B.I.A. Aaa 6.125 12/01/24 500 502,565
Wayne Cnty. Bldg. Auth., Ser. A Baa 8.00 3/01/17 1,250(b) 1,491,013
Western Michigan Univ. Gen. Rev., F.G.I.C. Aaa 5.00 7/15/21 500 441,240
Wyandotte Elec. Rev., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,185,460
-----------
Total long-term investments (cost $63,241,333) 66,354,110
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-121
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--0.3%
Michigan Strategic Fund Poll. Ctrl. Rev., Consumers Pwr.
Proj., F.R.D.D., Ser. 88A
(cost $200,000) P-1 3.55% 9/01/95 $ 200 $ 200,000
-----------
Total Investments--97.0%
(cost $63,441,333; Note 4) 66,554,110
Other assets in excess of liabilities--3.0% 2,029,503
-----------
Net Assets--100% $68,583,613
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note(d).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Prerefunded issues are secured by escrowed cash and/or
direct U.S. guaranteed obligations.
(c) Pledged as initial margin on financial futures contracts.
(d) For purposes of amortized cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(e) Standard & Poor's rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-122
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $63,441,333)...................................................................... $66,554,110
Cash.......................................................................................................... 60,311
Interest receivable........................................................................................... 1,077,967
Receivable for investments sold............................................................................... 1,044,792
Receivable for Fund shares sold............................................................................... 16,297
Other assets.................................................................................................. 1,814
-----------
Total assets............................................................................................... 68,755,291
-----------
Liabilities
Accrued expenses.............................................................................................. 50,427
Dividends payable............................................................................................. 35,908
Management fee payable........................................................................................ 25,921
Payable for Fund shares reacquired............................................................................ 23,957
Distribution fee payable...................................................................................... 19,803
Due to broker-variation margin payable........................................................................ 14,062
Deferred trustee fees......................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 171,678
-----------
Net Assets.................................................................................................... $68,583,613
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 57,725
Paid-in capital in excess of par........................................................................... 64,831,781
-----------
64,889,506
Accumulated net realized gain on investments............................................................... 598,830
Net unrealized appreciation on investments................................................................. 3,095,277
-----------
Net assets, August 31, 1995................................................................................ $68,583,613
-----------
-----------
Class A:
Net asset value and redemption price per share
($27,024,496 / 2,273,555 shares of beneficial interest issued and outstanding).......................... $11.89
Maximum sales charge (3.0% of offering price).............................................................. .37
-----------
Maximum offering price to public........................................................................... $12.26
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($41,459,262 / 3,490,489 shares of beneficial interest issued and outstanding).......................... $11.88
-----------
-----------
Class C:
Net asset value, offering price and redemption price per share
($99,855 / 8,407 shares of beneficial interest issued and outstanding).................................. $11.88
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-123
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES MICHIGAN SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................. $ 4,423,046
---------------
Expenses
Management fee, net waiver of $22,911.... 323,133
Distribution fee--Class A................ 16,932
Distribution fee--Class B................ 261,080
Distribution fee--Class C................ 458
Custodian's fees and expenses............ 94,000
Reports to shareholders.................. 65,000
Transfer agent's fees and expenses....... 57,000
Registration fees........................ 42,000
Audit fee................................ 11,000
Legal fees............................... 10,000
Trustees' fees........................... 3,200
Miscellaneous............................ 7,168
---------------
Total expenses........................ 890,971
Less: custodian fee credit............... (2,591)
---------------
Net expenses.......................... 888,380
---------------
Net investment income....................... 3,534,666
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 1,174,983
Financial futures contract
transactions.......................... (329,952)
---------------
845,031
---------------
Net change in unrealized
appreciation/depreciation of:
Investments.............................. (146,487)
Financial futures contracts.............. 38,125
---------------
(108,362)
---------------
Net gain on investments..................... 736,669
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,271,335
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income.......... $ 3,534,666 $ 3,752,311
Net realized gain on investment
transactions................ 845,031 455,336
Net change in unrealized
appreciation/depreciation of
investments................. (108,362) (4,917,813)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 4,271,335 (710,166)
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (898,307) (237,966)
Class B..................... (2,633,512) (3,514,345)
Class C..................... (2,847) --
------------ ------------
(3,534,666) (3,752,311)
------------ ------------
Distributions from net realized
gains
Class A..................... (12,146) (25,697)
Class B..................... (177,027) (429,245)
Class C..................... (43) --
------------ ------------
(189,216) (454,942)
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 4,796,012 13,225,456
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 2,351,573 2,730,066
Cost of shares reacquired...... (13,930,082) (10,334,965)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (6,782,497) 5,620,557
------------ ------------
Total increase (decrease)......... (6,235,044) 703,138
Net Assets
Beginning of year................. 74,818,657 74,115,519
------------ ------------
End of year....................... $ 68,583,613 $ 74,818,657
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-124
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Michigan Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge it's
existing portfolio securities, or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason and because substantially all of the Series' gross income
consists of tax-exempt interest, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's
- --------------------------------------------------------------------------------
B-125
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
performance of such services. PMF has entered into a subadvisory agreement with
The Prudential Investment Corporation (``PIC''). PIC furnishes investment
advisory services in connection with the management of the Fund. PMF pays for
the services of PIC, the cost of compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $22,911
($0.004 per share for Class A, B and C shares; .03% of average net assets). The
Series' is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans''), regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $8,100 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $127,100 in contingent deferred sales charges imposed
upon certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $39,000 for the services of
PMFS. As of August 31, 1995, approximately $3,100 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $22,270,724 and
$30,476,270, respectively.
At August 31, 1995, the Fund sold 20 financial futures contracts on the
Municipal Bond Index and 10 on the U.S. Treasury Index both of which expire in
September, 1995. The value at disposition of such contracts is $3,420,313. The
value of such contracts on August 31, 1995 was $3,402,813, thereby resulting in
an unrealized loss of $17,500.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of August 31,
1995, net unrealized appreciation for federal income tax purposes was $3,112,777
(gross unrealized appreciation--$3,601,842; gross unrealized
depreciation--$489,065).
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Transactions in shares of
- --------------------------------------------------------------------------------
B-126
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
beneficial interest for the fiscal years ended August 31, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 39,300 $ 455,090
Shares issued in reinvestment of
dividends
and distributions................. 47,423 558,002
Shares reacquired................... (207,127) (2,427,463)
---------- ------------
Net decrease in shares outstanding
before conversion................. (120,404) (1,414,371)
Shares issued upon conversion from
Class B........................... 1,993,537 23,087,478
---------- ------------
Net increase in shares
outstanding....................... 1,873,133 $ 21,673,107
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 125,287 $ 1,540,765
Shares issued in reinvestment of
dividends
and distributions................. 14,526 176,113
Shares reacquired................... (44,147) (531,472)
---------- ------------
Net increase in shares
outstanding....................... 95,666 $ 1,185,406
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 366,931 $ 4,247,921
Shares issued in reinvestment of
dividends
and distributions................. 155,664 1,790,735
Shares reacquired................... (1,004,534) (11,502,619)
---------- ------------
Net decrease in shares outstanding
before conversion................. (481,939) (5,463,963)
Shares reacquired upon conversion
into Class A...................... (1,995,260) (23,087,478)
---------- ------------
Net decrease in shares
outstanding....................... (2,477,199) $(28,551,441)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 953,569 $ 11,684,491
Shares issued in reinvestment of
dividends
and distributions................. 210,536 2,553,953
Shares reacquired................... (816,504) (9,803,493)
---------- ------------
Net increase in shares
outstanding....................... 347,601 $ 4,434,951
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 8,149 $ 93,001
Shares issued in reinvestment of
dividends
and distributions................. 241 2,836
---------- ------------
Net increase in shares
outstanding....................... 8,390 $ 95,837
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold......................... 17 $ 200
---------- ------------
Net increase in shares
outstanding....................... 17 $ 200
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-127
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......... $ 11.75 $12.51 $11.90 $11.30 $10.81
------- ------ ------ ------ ------
Income from investment operations
Net investment income...................... .64(a) .64 .67 .68 .67
Net realized and unrealized gain (loss) on
investment transactions.................. .17 (.69) .71 .60 .49
------- ------ ------ ------ ------
Total from investment operations........ .81 (.05) 1.38 1.28 1.16
------- ------ ------ ------ ------
Less distributions
Dividends from net investment income....... (.64) (.64) (.67) (.68) (.67)
Distributions from net realized gains...... (.03) (.07) (.10) -- --
------- ------ ------ ------ ------
Total distributions..................... (.67) (.71) (.77) (.68) (.67)
------- ------ ------ ------ ------
Net asset value, end of year............... $ 11.89 $11.75 $12.51 $11.90 $11.30
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):........................... 7.13% (0.38)% 11.95% 11.63% 11.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).............. $27,024 $4,706 $3,814 $1,618 $835
Average net assets (000)................... $16,932 $4,505 $2,285 $1,235 $694
Ratios to average net assets:
Expenses, including distribution fees... 1.02%(a) .91% .96% .98% 1.09%
Expenses, excluding distribution fees... .92%(a) .81% .86% .88% .99%
Net investment income................... 5.31%(a) 5.27% 5.51% 5.82% 6.09%
Portfolio turnover rate.................... 33% 12% 14% 30% 62%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment of dividends
and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-128
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- -------------------------
August 1,
Year 1994(d)
Year Ended August 31, Ended through
------------------------------------------------------- August 31, August 31,
1995 1994 1993 1992 1991 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
------- ------- ------- ------- ------- ---------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.75 $ 11.78
<CAPTION>
------- ------- ------- ------- ------- ---------- --------
Income from investment operations
Net investment income...................... .59(a) .59 .62 .63 .63 .56(a) .04
Net realized and unrealized gain (loss) on
investment transactions.................. .16 (.69) .71 .60 .49 .16 (.03)
<CAPTION>
------- ------- ------- ------- ------- ---------- -------
Total from investment operations........ .75 (.10) 1.33 1.23 1.12 .72 .01
<CAPTION>
------- ------- ------- ------- ------- ---------- -------
Less distributions
Dividends from net investment income....... (.59) (.59) (.62) (.63) (.63) (.56) (.04)
Distributions from net realized gains...... (.03) (.07) (.10) -- -- (.03) --
------- ------- ------- ------- ------- ---------- -------
Total distributions..................... (.62) (.66) (.72) (.63) (.63) (.59) (.04)
------- ------- ------- ------- ------- ---------- -------
Net asset value, end of period............. $ 11.88 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 11.88 $ 11.75
------- ------- ------- ------- ------- ---------- -------
------- ------- ------- ------- ------- ---------- -------
TOTAL RETURN(b):........................... 6.60% (0.78)% 11.51% 11.18% 10.60% 6.29% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $41,459 $70,112 $70,302 $56,095 $59,400 $100 $200(e)
Average net assets (000)................... $52,216 $72,095 $61,548 $52,137 $50,809 $61 $199(e)
Ratios to average net assets:
Expenses, including distribution fees... 1.37%(a) 1.31% 1.36% 1.38% 1.49% 1.68%(a) 2.15%(c)
Expenses, excluding distribution fees... .87%(a) .81% .86% .88% .99% .93%(a) 1.39%(c)
Net investment income................... 5.04%(a) 4.87% 5.11% 5.42% 5.66% 4.66%(a) 4.56%(c)
Portfolio turnover rate.................... 33% 12% 14% 30% 62% 33% 12%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Figures are actual and not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-129
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report MICHIGAN SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Michigan Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Michigan
Series, as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Michigan Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-130
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.5%
- ------------------------------------------------------------------------------------------------------------------------------
Atlantic City, Gen. Oblig., Ser. A BAA1 Zero 11/01/06 $ 1,490 $ 838,065
Atlantic City Mun. Utils. Auth. Rev., Wtr. System A-(c) 7.75% 5/01/17 2,000 (e) 2,298,580
Bergen Cnty., Utils. Auth.,
Wtr. Poll. Ctrl. Rev., F.G.I.C., Ser. B Aaa 5.75 12/15/05 1,000 1,069,630
Wtr. Poll. Ctrl. Rev., F.G.I.C., Ser. B Aaa Zero 12/15/08 7,250 3,598,973
Camden Cnty. Fin. Auth., F.S.A. Aaa Zero 2/15/03 1,600 1,119,312
Camden Cnty. Poll. Ctrl. Fin. Auth., Solid Waste Res.
Rec. Rev., Ser. B Ba 7.50 12/01/09 3,400 3,472,624
Cape May Cnty. Ind. Poll. Ctrl., Fin. Auth. Rev.,
M.B.I.A. Aaa 6.80 3/01/21 2,615 2,999,248
Cherry Hill Township Aa 5.90 6/01/05 1,000 1,060,140
Cherry Hill Township Aa 6.30 6/01/12 2,000 2,092,040
Cinnaminson Sewage Auth. Rev. A1 7.40 2/01/15 1,600 1,812,224
Delaware River Bay Auth., M.B.I.A. Aaa 5.00 1/01/17 2,250 2,028,555
Edison Twnshp., Gen. Oblig., A.M.B.A.C. Aaa 6.00 1/01/08 5,390 5,758,191
Egg Harbor Twnshp. Sch. Dist., F.S.A. Aaa 4.75 2/15/09 1,010 933,169
Egg Harbor Twnshp. Sch. Dist., Cert. of Part., M.B.I.A. Aaa 7.40 4/01/02 1,000(d)(e) 1,119,400
Essex Cnty. Impvt. Auth., A.M.B.A.C. Aaa 5.50 12/01/20 1,600 1,534,560
Essex Cnty. New Jersey Refunding Series A-1, A.M.B.A.C. Aaa 5.375 9/01/10 6,000 5,822,760
Evesham Mun. Utils. Auth. Rev., Ser. B, M.B.I.A. Aaa 7.00 7/01/10 2,000 2,180,400
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/03 500 570,650
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/04 500 573,885
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/05 500 576,075
Howell Twnshp. Mun. Utils. Auth. Rev., 2nd Ser. NR 8.60 1/01/14 750 (e) 849,683
Hudson Cnty. Impvt. Auth.,
Solid Waste Sys. Rev. BBB-(c) 7.10 1/01/20 2,050 2,047,356
Solid Waste Sys. Rev. A+(c) 6.10 7/01/20 1,500 1,510,485
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/04 1,020 1,160,760
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/05 940 1,072,784
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/10 1,600 1,803,824
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/11 1,600 1,801,760
Jersey City, Gen. Oblig., F.S.A., Ser. A Aaa 9.25 5/15/04 4,310 5,635,972
Jersey City, Hudson Cnty. Qualified Water Auth. Rev.,
F.S.A. Aaa 5.00 12/15/17 1,200 1,087,608
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-131
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Jersey City, Redev. Auth. Rev., Red Dixon Mill Apts.
Proj., F.N.M.A. AAA(c) 6.10% 5/01/12 $ 5,000 $ 5,127,400
Lakewood Twnshp., Gen., Oblig., F.G.I.C. Aaa 6.60 12/01/04 450 509,886
Lakewood Twnshp., Gen., Oblig., F.G.I.C. Aaa 6.60 12/01/05 445 505,342
Lenape Regl. High Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 7.625 1/01/12 400 487,368
Mercer Cnty. Impvt. Auth. Rev. Aa1 Zero 4/01/06 2,500 1,459,550
Mercer Cnty. Impvt. Auth. Rev. Aa1 Zero 4/01/07 2,725 1,490,003
Mercer Cnty. Impvt. Auth. Rev.,
West Windsor Twnshp. Police Proj. Aa 6.00 11/15/10 1,250 1,273,337
Middle Twnshp. Sch. Dist., F.G.I.C. Aaa 7.00 7/15/05 1,200 1,394,268
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/13 1,140 1,110,497
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/14 1,135 1,095,706
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/16 1,150 1,095,755
Millburn Twnshp. Brd. of Ed. Aaa 5.35 7/15/17 1,150 1,091,695
Monmouth Cnty. Impvt. Auth. Rev.,
Howell Twnshp. Brd. of Ed. Proj. Rev. AA(c) 6.45 7/01/08 2,000 2,161,780
Nat'l Auth. Rev. AA(c) 6.55 7/01/12 4,065 4,354,143
Water & Sewage Facs Rev., M.B.I.A. Aaa 5.00 2/01/13 1,600 1,459,120
Wtr. Treatment Fac., M.B.I.A. Aaa 6.875 8/01/12 750 841,200
Morris Cnty. Aaa 5.00 7/15/14 3,180 2,910,718
Morris Cnty. Aaa 5.00 7/15/15 3,180 2,878,472
Water Facs., F.G.I.C. NR 8.20 11/01/29 5,000 (f) 4,737,500
Middlesex Water Co., A.M.B.A.C. Aaa 5.25 10/01/23 2,900 2,620,759
New Jersey St. Bldg. Auth. Rev. Aa 5.00 6/15/17 1,000 881,410
New Jersey St. Bldg. Auth. Rev., Garden St. Svg. Bonds,
Ser. A Aa Zero 6/15/03 890 612,747
New Jersey St. Econ. Dev. Auth.,
Amer. Airlines Inc. Proj. Baa2 7.10 11/01/31 3,900 4,056,000
Jersey Central Pwr. & Light Aa 7.10 7/01/15 400 423,924
Nat'l. Assoc. of Accountants NR 7.50 7/01/01 1,050 1,105,356
Nat'l. Assoc. of Accountants NR 7.65 7/01/09 950 999,447
Peddie School Project AA-(c) 5.75 2/01/12 1,250 1,249,925
St Barnabas Reality Project M.B.I.A. Aaa 5.25 7/01/20 3,000 2,784,000
New Jersey St. Econ. Dist. Heating & Cool., Trigen
Trenton Proj., Ser. B BBB-(c) 6.20 12/01/07 2,725 2,840,077
New Jersey Econ. Dist. Heating & Cool., Trigen Trenton
Proj. BBB-(c) 6.20 12/01/10 600 602,628
New Jersey St. Edl. Facs. Fin. Auth. Rev.,
Princeton University Aaa 5.25 7/01/25 3,760 3,503,079
Princeton Inst. For Advanced Study, Ser. B Aaa 6.35 7/01/21 5,620 5,797,479
Seton Hall Univ. Proj., Ser. B, M.B.I.A. Aaa 6.25 7/01/07 680 726,254
Seton Hall Univ. Proj., Ser. D Baa1 7.00 7/01/21 2,000 2,115,620
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-132
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New Jersey St. Hlth. Care Facs. Fin. Auth. Rev.,
Atlantic City Med. Ctr., Ser. C A 6.80% 7/01/11 $ 3,900 $ 4,083,846
East Orange Gen. Hosp., Ser. B BBB+(c) 7.75 7/01/20 2,250 2,385,248
Helene Fuld Med. Ctr., Ser. C A(c) 8.00 7/01/08 2,700 2,998,350
Helene Fuld Med. Ctr., Ser. C A(c) 8.125 7/01/13 500 552,805
Intercare Hlth. Systems-JFK Ctr. A 7.50 7/01/07 1,000 1,092,570
Intercare Hlth. Systems-JFK Ctr. A 7.625 7/01/18 945 1,039,566
Jersey Shore Med. Ctr., A.M.B.A.C. Aaa 6.00 7/01/09 1,465 1,526,486
Jersey Shore Med. Ctr. Aaa 6.25 7/01/21 1,500 1,539,000
Kensington Cmnty. Med. Ctr., M.B.I.A. Aaa 7.00 7/01/20 3,450 3,790,791
Rahway Hospital, Ser. B Baa1 7.75 7/01/14 4,740 4,851,864
St. Peters Med. Ctr., M.B.I.A., Ser. E Aaa 6.50 7/01/07 1,725 (e) 1,922,978
Somerset Med. Ctr., F.G.I.C. Aaa 5.20 7/01/24 1,015 920,260
Warren Hosp. AA(c) 5.25 7/01/14 2,985 2,709,096
New Jersey St. Hsg. & Mtge. Fin. Agcy., M.B.I.A., Ser. D Aaa 7.70 10/01/29 4,810 5,084,218
New Jersey St. Hsg. & Mtge. Fin. Agcy., Tiffany Manor,
Ser. B A+(c) 6.75 11/01/11 2,190 2,268,840
New Jersey St. Hwy. Auth., Garden St. Pkwy. Gen. Rev. A1 6.20 1/01/10 3,035 3,224,839
New Jersey St. Trans. Trust Fund Auth.,
Trans. Sys., M.B.I.A. Aaa 5.00 6/15/15 4,000 3,669,920
Trans. Sys., M.B.I.A. Aaa 6.50 6/15/11 5,000 5,483,600
Trans. Sys., M.B.I.A. Aaa 5.50 6/15/15 5,000 4,830,000
New Jersey St. Tpke. Auth. Rev.,
Ser. C, M.B.I.A. Aaa 6.50 1/01/09 1,000 1,106,520
Ser. C, M.B.I.A. Aaa 6.50 1/01/16 14,835 16,157,392
Ser. A A 6.75 1/01/08 2,000 2,169,100
New Jersey St. Wastewater Treatment,
Trust Loan Rev. Aa 6.875 6/15/06 1,000 1,100,590
Trust Loan Rev., Ser. A Aa 6.00 7/01/09 1,000 1,032,010
North Brunswick Twnshp.,
Brd. of Ed., Gen. Oblig. Aa 6.80 6/15/06 350 401,377
Brd. of Ed., Gen. Oblig. Aa 6.80 6/15/07 350 399,854
Rict Hosp. Rev., Gen. Oblig. Aa 6.40 5/15/10 2,000 2,127,380
Passaic Valley New Jersey Water Comm. Water Supply Rev.,
F.G.I.C. Aaa 5.00 12/15/22 5,000 4,454,750
Paterson Cnty., F.S.A. Aaa 6.50 2/15/05 2,000 2,185,180
Pennsauken Twnshp., Brd. of Ed., Cert. of Part., B.I.G. Aaa 7.70 7/15/09 1,030 1,153,785
Port Auth. New York & New Jersey, Ser. 92 A1 5.00 7/15/23 2,000 1,730,660
Port Auth. New York & New Jersey A1 5.75 6/15/30 5,025 4,834,753
Port Auth. New York & New Jersey, A1 5.75 12/15/20 500 486,955
Ser. 96, F.G.I.C. Aaa 6.60 10/01/23 2,750 2,880,103
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-133
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Comnwlth.,
Gen. Oblig., M.B.I.A. Aaa 5.50% 7/01/08 $ 3,000 $ 3,091,770
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 10,250 11,896,662
Pub. Impvt. Ref., M.B.I.A. Aaa 7.00 7/01/10 1,000 (d) 1,160,650
Puerto Rico Elec. Pwr. Auth. Rev., Ref. Ser. S Baa1 6.125 7/01/08 2,300 2,422,199
Puerto Rico Hwy. Auth. Rev.,
Ser. Q AAA(c) 7.75 7/01/10 2,000(d)(e) 2,323,460
Ser. R Baa1 6.75 7/01/05 1,000 1,088,610
Ser. S AAA(c) 6.50 7/01/22 750 (e) 844,223
Puerto Rico Indus. Tourist Edl. Hosp. Auxilio Mutuo
Oblig.
Grp A, M.B.I.A. Aaa 6.25 7/01/24 3,000 3,065,640
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.363 1/25/07 7,875 (f) 7,845,469
Rutgers St. Univ. Rev.,
Ser. A A1 6.40 5/01/13 5,000 5,368,550
Ser. P A1 6.85 5/01/12 2,810 3,047,895
Salem Cnty. New Jersey Indus. Poll. Cntl. Fin. Auth.
Rev. Aaa 5.55 11/01/33 8,000 7,530,240
South Brunswick Twnshp.,
Wtr. & Swr. Utils., Gen. Impvt. NR 6.90 8/01/05 850 952,697
Wtr. & Swr. Utils., Gen. Impvt. NR 6.90 8/01/06 850 952,697
Union City New Jersey, Sch.Impvt., F.S.A. Aaa 6.375 11/01/08 1,545 1,685,502
Union Cnty. Utils. Auth.,
Solid Waste Rev., Ser. A A-(c) 7.10 6/15/06 1,255 1,302,941
Solid Waste Rev., Ser. A A-(c) 7.20 6/15/14 6,850 7,124,342
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund BBB(c) 7.70 10/01/04 2,750 3,013,505
Virgin Islands Territory, Hugo Ins. Claims Fund Prog.,
Ser. 91. NR 7.75 10/01/06 1,970 2,146,670
West Morris Regl. High Sch. Dist., Cert. of Part.,
B.I.G. Aaa 7.50 3/15/09 1,500 1,648,425
West New York & New Jersey,
Mun. Utils., Auth. Swr. Rev., F.G.I.C. Aaa Zero 12/15/06 3,540 2,009,339
Mun. Utils., Auth. Swr. Rev., F.G.I.C. Aaa Zero 12/15/12 1,410 534,503
Mun. Utils., Auth. Swr. Rev., F.G.I.C. Aaa Zero 12/15/13 2,910 1,035,524
------------
Total long-term investments (cost $279,205,394) 293,017,357
------------
SHORT-TERM INVESTMENTS--0.6%
New Jersey Eco. Dev. Auth., F.R.D.D.,
Dow Chemical, Ser. 84A P1 3.35 9/01/95 100 100,000
Dow Chemical, Ser. 84B P1 3.35 9/01/95 800 800,000
Port Auth. of New York & New Jersey, Spec. Oblig. Rev.,
Ser.1 F.R.D.D. VMIG1 3.45 9/01/95 600 600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-134
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Union Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev., Poll.
Ctrl. Rev.,
F.R.D.D., Ser. 94 P1 3.25% 9/01/95 $ 300 $ 300,000
------------
Total short-term investments (cost $1,800,000) 1,800,000
------------
Total Investments--99.1%
(cost $281,005,394; Note 4) 294,817,357
Other assets in excess of liabilities--0.9% 2,552,590
------------
Net Assets--100% $297,369,947
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
F.N.M.A.--Federal National Mortgage Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of
the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted.
(c) Standard & Poor's Rating.
(d) Pledged as initial margin on financial futures contracts.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(f) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
</TABLE>
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-135
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $281,005,394).................................................................... $294,817,357
Cash......................................................................................................... 94,799
Interest receivable.......................................................................................... 3,717,758
Receivable for Fund shares sold.............................................................................. 130,295
Deferred expenses and other assets........................................................................... 51,498
------------
Total assets.............................................................................................. 298,811,707
------------
Liabilities
Payable for Fund shares reacquired........................................................................... 1,074,124
Due to Distributors.......................................................................................... 109,328
Dividends payable............................................................................................ 154,410
Due to Manager............................................................................................... 81,517
Due to broker-variation margin payable....................................................................... 20,781
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 1,441,760
------------
Net Assets................................................................................................... $297,369,947
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 270,807
Paid-in capital in excess of par.......................................................................... 285,074,748
------------
285,345,555
Accumulated net realized loss on investments.............................................................. (1,747,102)
Net unrealized appreciation on investments................................................................ 13,771,494
------------
Net assets, August 31, 1995.................................................................................. $297,369,947
------------
------------
Class A:
Net asset value and redemption price per share
($49,665,933 / 4,523,163 shares of beneficial interest issued and outstanding)......................... $10.98
Maximum sales charge (3.0% of offering price)............................................................. .34
------------
Maximum offering price to public.......................................................................... $11.32
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($246,201,663 / 22,420,702 shares of beneficial interest issued and outstanding)....................... $10.98
------------
------------
Class C:
Net asset value, offering price and redemption price per share
($1,502,351 / 136,816 shares of beneficial interest issued and outstanding)............................ $10.98
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-136
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................... $19,123,944
---------------
Expenses
Management fee, net of waiver of
$483,073................................ 1,047,300
Distribution fee--Class A.................. 30,290
Distribution fee--Class B.................. 1,374,973
Distribution fee--Class C.................. 5,924
Transfer agent's fees and expenses......... 138,000
Custodian's fees and expenses.............. 110,000
Reports to shareholders.................... 63,000
Registration fees.......................... 19,000
Audit fee.................................. 11,000
Legal fees................................. 10,000
Insurance.................................. 9,500
Trustee's fees............................. 3,200
Miscellaneous.............................. 14,050
---------------
Total expenses.......................... 2,836,237
Less: Custodian fee credit................. (43,589)
---------------
Net expenses........................... 2,792,648
---------------
Net investment income......................... 16,331,296
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized (gain) loss on:
Investment transactions.................... 2,223,013
Financial futures contract transactions.... (911,541)
Options purchased.......................... (53,313)
---------------
1,258,159
---------------
Net change in unrealized appreciation on:
Investments................................ 1,994,868
Financial futures contracts................ 2,281
---------------
1,997,149
---------------
Net gain on investments....................... 3,255,308
---------------
Net Increase in Net Assets
Resulting from Operations..................... $19,586,604
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------------- ------------
<S> <C> <C>
Operations
Net investment income......... $ 16,331,296 $ 18,099,624
Net realized gain (loss) on
investment transactions.... 1,258,159 (1,294,945)
Net change in unrealized
appreciation/depreciation
of investments............. 1,997,149 (23,297,125)
------------- ------------
Net increase (decrease) in net
assets resulting from
operations................. 19,586,604 (6,492,446)
------------- ------------
Dividends and distributions (Note 1):
Dividends from net investment
income
Class A.................... (1,712,625) (831,601)
Class B.................... (14,579,222) (17,267,981)
Class C.................... (39,449) (42)
------------- ------------
(16,331,296) (18,099,624)
------------- ------------
Distributions from net
realized gains
Class A.................... -- (237,645)
Class B.................... -- (5,452,932)
------------- ------------
-- (5,690,577)
------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold....................... 18,110,094 41,819,711
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 9,760,545 14,387,672
Cost of shares reacquired..... (71,846,422) (55,213,009)
------------- ------------
Net increase (decrease) in net
assets from Series share
transactions............... (43,975,783) 994,374
------------- ------------
Total increase (decrease)........ (40,720,475) (29,288,273)
Net Assets
Beginning of year................ 338,090,422 367,378,695
------------- ------------
End of year...................... $ 297,369,947 $338,090,422
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-137
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984, and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Series (the ``Series'')
commenced investment operations in March 1988. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from securities or currencies based upon the type of option
written. The difference between the premium and the amount paid on effecting a
closing purchase transaction, including brokerage commissions, is also treated
as a realized gain, or if the premium received is less than the amount paid for
the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has realized a gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
securities or currencies purchased by the Fund. The Fund as writer of an option
may have no control over whether the underlying securities may be sold (call) or
purchased (put) and as a result bears the market risk of an unfavorable change
in the price of the security underlying the written option. There were no
written options outstanding at August 31, 1995.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code
- --------------------------------------------------------------------------------
B-138
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason and because substantially all of the
Series' gross income consists of tax-exempt interest, no federal income tax
provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
short-term capital gains and market discount.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''). PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. For the four
months ended December 31, 1994, PMF waived 25% of its management fee. For the
eight months ended August 31, 1995, PMF waived 35% of its management fee. The
amount of fees waived for the fiscal year ended August 31, 1995, amounted to
$483,073 ($0.018 per share for Class A, B and C shares; 0.16% of average net
assets). The Series is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $16,200 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $665,390 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C (per Note 5) shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the fiscal year ended August
31, 1995, the Series incurred fees of approximately $110,100 for the services of
PMFS. As of August 31, 1995, approximately $8,800 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995, were $110,077,138 and
$152,249,270, respectively.
At August 31, 1995 the Series sold 35 financial futures contracts on U.S.
Treasury Bonds which expire in September 1995. The value at disposition of such
contracts was $3,920,000. The value of such contracts on August 31, 1995 was
$3,960,469, thereby resulting in an unrealized loss of $40,469.
- --------------------------------------------------------------------------------
B-139
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
The cost basis of investments for federal income tax purposes at August 31,
1995, was $281,017,544 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes is $13,799,813 (gross unrealized
appreciation--$15,035,122; gross unrealized depreciation--$1,235,309).
For federal income tax purposes, the Fund has a capital loss carryforward as of
August 31, 1995 of approximately $1,724,478 which will expire in 2003.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until future net gains have been realized in excess of such
carryforward.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 146,305 $ 1,554,250
Shares issued in reinvestment
of dividends...................... 101,255 1,092,947
Shares reacquired................... (644,816) (6,937,778)
---------- ------------
Net decrease in shares outstanding
before conversion................. (397,256) (4,290,581)
Shares issued upon conversion from
Class B........................... 3,553,656 38,072,569
---------- ------------
Net increase in shares
outstanding....................... 3,156,400 $ 33,781,988
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 314,116 $ 3,550,381
Shares issued in reinvestment of
distributions..................... 62,184 699,684
Shares reacquired................... (329,592) (3,698,430)
---------- ------------
Net increase in shares
outstanding....................... 46,708 $ 551,635
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 1,439,537 $ 15,328,727
Shares issued in reinvestment
of dividends...................... 811,273 8,636,803
Shares reacquired................... (6,166,186) (64,879,456)
---------- ------------
Net decrease in shares outstanding
before conversion................. (3,915,376) (40,913,926)
Shares reacquired upon conversion
into Class A...................... (3,553,656) (38,072,569)
---------- ------------
Net decrease in shares
outstanding....................... (7,469,032) $(78,986,495)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 3,349,228 $ 38,030,222
Shares issued in reinvestment
of dividends and distributions.... 1,214,942 13,687,960
Shares reacquired................... (4,642,077) (51,514,579)
---------- ------------
Net decrease in shares
outstanding....................... (77,907) $ (203,603)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Six months ended August 31, 1995:
Shares sold......................... 114,493 $ 1,227,117
Shares issued in reinvestment
of dividends...................... 2,852 30,795
Shares reacquired................... (2,705) (29,188)
---------- ------------
Net increase in shares
outstanding....................... 114,640 $ 1,228,724
---------- ------------
---------- ------------
August 1, 1994* through August 31,
1994:
Shares sold......................... 22,173 $ 239,108
Shares issued in reinvestment
of dividends...................... 3 28
Shares reacquired................... -- --
---------- ------------
Net increase in shares
outstanding....................... 22,716 $ 239,136
---------- ------------
---------- ------------
- ---------------
* Commencement of offering Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-140
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended August 31,
------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $10.16
------- ------- ------- ------- ------
Income from investment operations
Net investment income(a)................. .61 .61 .64 .67 .69
Net realized and unrealized gain (loss)
on investment transactions............ .17 (.75) .71 .51 .59
------- ------- ------- ------- ------
Total from investment operations...... .78 (.14) 1.35 1.18 1.28
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income..... (.61) (.61) (.64) (.67) (.69)
Distributions from net realized gains on
investment transactions............... -- (.18) (.12) (.09) (.02)
------- ------- ------- ------- ------
Total distributions................... (.61) (.79) (.76) (.76) (.71)
------- ------- ------- ------- ------
Net asset value, end of year............. $ 10.98 $ 10.81 $ 11.74 $ 11.15 $10.73
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(b):......................... 7.55% (1.27)% 12.57% 11.35% 12.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............ $49,666 $14,774 $15,501 $11,941 $8,041
Average net assets (000)................. $30,290 $15,334 $13,444 $ 9,759 $5,637
Ratios to average net assets:(a)
Expenses, including distribution
fees............................... .55% .58% .61% .48% .29%
Expenses, excluding distribution
fees............................... .45% .48% .51% .38% .19%
Net investment income................. 5.65% 5.42% 5.63% 6.14% 6.58%
Portfolio turnover rate.................. 37% 34% 32% 38% 116%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management and/or distribution fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-141
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ----------
------------------------------------------------------------ Year
Year Ended August 31, Ended
------------------------------------------------------------ August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $10.81
-------- -------- -------- -------- -------- -----
Income from investment operations
Net investment income(a)................. .57 .56 .59 .63 .65 .54
Net realized and unrealized gain (loss)
on investment transactions............ .17 (.75) .71 .51 .59 .17
-------- -------- -------- -------- -------- -----
Total from investment operations...... .74 (.19) 1.30 1.14 1.24 .71
-------- -------- -------- -------- -------- -----
Less distributions
Dividends from net investment income..... (.57) (.56) (.59) (.63) (.65) (.54)
Distributions from net realized gains on
investment transactions............... -- (.18) (.12) (.09) (.02) --
-------- -------- -------- -------- -------- ------
Total distributions................... (.57) (.74) (.71) (.72) (.67) (.54)
-------- -------- -------- -------- -------- ------
Net asset value, end of period........... $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $10.98
-------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- ------
TOTAL RETURN(b):......................... 7.12% (1.67)% 12.12% 10.93% 12.52% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $246,202 $323,077 $351,878 $295,781 $244,322 $1,502
Average net assets (000)................. $274,995 $343,941 $316,372 $269,318 $208,893 $ 790
Ratios to average net assets:(a)
Expenses, including distribution
fees............................... .95% .98% 1.01% .88% .69% 1.20%
Expenses, excluding distribution
fees............................... .45% .48% .51% .38% .19% .45%
Net investment income................. 5.30% 5.02% 5.23% 5.74% 6.18% 4.99%
Portfolio turnover rate.................. 37% 34% 32% 38% 116% 37%
<CAPTION>
August 1,
through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..... $10.83
-----
Income from investment operations
Net investment income(a)................. .04
Net realized and unrealized gain (loss)
on investment transactions............ (.02)
-----
Total from investment operations...... .02
-----
Less distributions
Dividends from net investment income..... (.04)
Distributions from net realized gains on
investment transactions............... --
-----
Total distributions................... (.04)
-----
Net asset value, end of period........... $10.81
-----
-----
TOTAL RETURN(b):......................... 0.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $ 240
Average net assets (000)................. $ 11
Ratios to average net assets:(a)
Expenses, including distribution
fees............................... 1.29%(c)
Expenses, excluding distribution
fees............................... .54%(c)
Net investment income................. 5.06%(c)
Portfolio turnover rate.................. 34%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of management and/or distribution fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-142
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW JERSEY SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, New Jersey
Series, as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New Jersey Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-143
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Atlantic Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D. VMIG1 3.50% 9/06/95 $ 1,300 $ 1,300,000
Burlington County, B.A.N. NR 5.00 11/30/95 6,000 6,004,228
East Brunswick Twnshp., B.A.N. NR 5.75 1/03/96 7,000 7,015,838
Gloucester Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev.,
Mobil Corp. Proj., F.R.W.D. P-1 3.20 9/06/95 4,610 4,610,000
Monsanto Co. Proj., Ser. 92, F.R.W.D. P-1 3.45 9/06/95 3,120 3,120,000
Hudson Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D. A-1(c) 3.55 9/07/95 4,445 4,445,000
Jersey City, Ser. 94, B.A.N. NR 4.75 9/29/95 5,000 5,001,654
Maplewood Twnshp., B.A.N. NR 5.25 10/17/95 5,318 5,321,720
New Jersey St. Econ. Dev. Auth.,
Applewood Ctr. for Aging, Ser.89, F.R.W.D. A-1(c) 3.60 9/07/95 7,350 7,350,000
Catholic Cmnty. Svcs Proj., Ser. 93, F.R.W.D. VMIG1 3.45 9/07/95 6,000 6,000,000
Catholic Cmnty. Svcs Proj., Ser. 95, F.R.W.D. VMIG1 3.45 9/07/95 1,250 1,250,000
Chambers Cogeneration Ltd., Ser. 91, T.E.C.P. VMIG1 3.65 9/21/95 3,000 3,000,000
Chambers Cogeneration Ltd., Ser. 91, T.E.C.P. VMIG1 3.95 10/19/95 4,400 4,400,000
Dow Chemical, Ser. 84A, F.R.D.D. P1 3.35 9/01/95 7,000 7,000,000
East Meadow Corp., Ser. 86A, F.R.W.D. VMIG1 3.75 9/06/95 2,675 2,675,000
Econ. Growth Bds., Ser. 94B, F.R.W.D. A-1+(c) 3.60 9/07/95 2,000 2,000,000
Fellowship Village Proj., Ser. 95, F.R.W.D. VMIG1 3.55 9/07/95 7,000 7,000,000
Franciscan Oaks Proj., Ser. 92B, F.R.W.D. A-1+(c) 3.40 9/06/95 1,600 1,600,000
General Motors Proj., F.R.W.D. VMIG2 3.60 9/06/95 7,350 7,350,000
Hillcrest Health Svc. Sys. Proj., Ser. 95, F.R.W.D. P1 3.60 9/06/95 8,000 8,000,000
Hoffman La-Roche Inc. Proj., Ser. 93, F.R.D.D. Aaa 3.35 9/01/95 5,000 5,000,000
Kent Place, Ser. 92L, F.R.W.D. VMIG1 3.55 9/07/95 1,940 1,940,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.95 10/19/95 1,500 1,500,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.60 10/27/95 2,600 2,600,000
Marriot Corp. Proj., Ser. 84, F.R.W.D. P1 3.15 9/06/95 6,700 6,700,000
Michael Shalit Proj., Ser. 93, F.R.D.D. Aa3 3.35 9/01/95 1,800 1,800,000
North Plainfield Hldg., Ser. 92, A.O.T. VMIG1 4.15 9/01/96 3,880 3,880,000
Ocean Spray Cranberry Inc. Proj., Ser. 87, S.A.O.T. A+(c) 4.00 7/01/96 5,455 5,455,000
Office Court Assoc. Proj., F.R.W.D. A-1+(c) 3.60 9/05/95 1,850 1,850,000
Peddie Sch. Proj., Ser. 94B, F.R.W.D. A-1(c) 3.65 9/07/95 3,000 3,000,000
RJB Associates LTD., F.R.W.D. Aa3 3.65 9/07/95 1,580 1,580,000
Russ Berrie & Co., Ser. 83, F.R.W.D. A-1(c) 3.35 9/06/95 200 200,000
New Jersey St. Hsg. Fin. Agcy., Ser. 92A, Q.T.P.O.T. AA+(c) 3.75 11/01/95 3,000 3,000,000
New Jersey St. Tpke. Auth. Rev., Ser. 91D, F.R.W.D. VMIG1 3.05 9/06/95 12,000 12,000,000
Newark Healthcare Facs. Rev., Ser. 95A, F.R.W.D. A-1(c) 3.50 9/07/95 2,965 2,965,000
Passaic County, B.A.N. NR 5.00 4/05/96 4,000 4,013,613
Port Auth. of New York & New Jersey, F.R.W.D.,
Ser. 93-2 NR 3.627 9/05/95 8,000 8,000,000
KIAC Partners, Ser. 93-2 VMIG1 3.40 9/06/95 2,900 2,900,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-144
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Comnwlth. Hwy. & Trans. Auth. Rev., F.R.W.D. VMIG1 3.20% 9/06/95 $ 200 $ 200,000
Puerto Rico Comnwlth.,
Gov't Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 6,800 6,800,000
Gov't Dev. Bank., Ser. 95, T.E.C.P. A-1+(c) 4.10 9/08/95 2,500 2,500,000
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fin. Auth.
Rev.,
Inter American Proj., Ser. 88, T.E.C.P. VMIG1 3.65 9/08/95 2,800 2,800,000
Rockaway Twnshp., B.A.N. NR 3.92 7/31/96 4,899 4,900,174
------------
Total Investments--98.7%
(amortized cost $180,027,227(d)) 180,027,227
Other assets in excess of liabilities--1.3% 2,425,565
------------
Net Assets--100% $182,452,792
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
Q.T.P.O.T.--Quarterly Third Party Optional Tender.
S.A.O.T.--Semi-Annual Optional Tender.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of such
securities are considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's rating.
(d) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-145
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $180,027,227
Cash......................................................................................................... 51,515
Receivable for investments sold.............................................................................. 4,115,000
Receivable for Series shares sold............................................................................ 2,080,414
Interest receivable.......................................................................................... 1,625,300
Deferred expenses and other assets........................................................................... 5,891
------------
Total assets.............................................................................................. 187,905,347
------------
Liabilities
Payable for investments purchased............................................................................ 3,880,000
Payable for Series shares reacquired......................................................................... 1,392,918
Dividends payable............................................................................................ 64,568
Management fee payable....................................................................................... 60,373
Accrued expenses and other liabilities....................................................................... 42,241
Distribution fee payable..................................................................................... 10,855
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 5,452,555
------------
Net Assets................................................................................................... $182,452,792
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 1,824,528
Paid-in capital in excess of par.......................................................................... 180,628,264
------------
Net assets, August 31, 1995.................................................................................. $182,452,792
------------
------------
Net asset value, offering price and redemption price per share ($182,452,792 / 182,452,792 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)........................ $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-146
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest and discount earned............. $ 6,375,246
---------------
Expenses
Management fee, net of waiver of
$214,029.............................. 642,087
Distribution fee......................... 214,029
Transfer agent's fees and expenses....... 90,000
Custodian's fees and expenses............ 50,000
Registration fees........................ 28,000
Reports to shareholders.................. 24,000
Legal fees............................... 13,000
Audit fee................................ 10,500
Deferred organization expenses........... 6,440
Insurance expense........................ 5,000
Trustees' fees........................... 3,000
Miscellaneous............................ 7,889
---------------
Total expenses........................ 1,093,945
Less: custodian fee credit............... (47,681)
---------------
Net expenses.......................... 1,046,264
---------------
Net investment income....................... 5,328,982
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 5,328,982
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income........ $ 5,328,982 $ 3,169,992
------------- -------------
Net increase in net assets
resulting from
operations................ 5,328,982 3,169,992
------------- -------------
Dividends to shareholders....... (5,328,982) (3,169,992)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
subscribed................ 621,173,812 556,557,575
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 5,178,490 3,057,774
Cost of shares reacquired.... (602,179,432) (564,422,228)
------------- -------------
Net increase (decrease) in
net assets from Series
share transactions........ 24,172,870 (4,806,879)
------------- -------------
Total increase (decrease)....... 24,172,870 (4,806,879)
Net Assets
Beginning of year............... 158,279,922 163,086,801
------------- -------------
End of year..................... $ 182,452,792 $ 158,279,922
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-147
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Money Market Series (the
``Series'') commenced investment operations on December 3, 1990. The Series is
non-diversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New Jersey State and federal income
taxes with a minimum of risk by investing in ``investment grade'' tax-exempt
securities maturing within 13 months or less and whose ratings are within the
two highest ratings categories by a nationally recognized statistical rating
organization, or if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Expenses: The Series incurred $32,200 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending December 1995.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of each of the Series. During
the year ended August 31, 1995, PMF waived 25% of its management fee. The amount
of such fees waived for the year ended August 31, 1995 amounted to $214,029
($.001 per share; .125% of average net assets).
The Fund has a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''). To reimburse PMFD for its expenses incurred pursuant to a plan
of distribution, the Fund pays PMFD a reimbursement, accrued daily and payable
monthly, at an annual rate of .125 of 1% of the Series' average daily net
assets. PMFD pays various broker-dealers, including Prudential Securities
Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B-148
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $82,000 for the services of PMFS. As
of August 31, 1995, approximately $7,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-149
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains(c).......................... .03 .02 .02 .04
Dividends and distributions.............................................. (.03) (.02) (.02) (.04)
-------- -------- -------- --------
Net asset value, end of period........................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(d):......................................................... 3.15% 1.90% 2.31% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $182,453 $158,280 $163,087 $164,092
Average net assets (000)................................................. $171,223 $169,123 $170,103 $155,915
Ratios to average net assets(c):
Expenses, including distribution fee.................................. .64% .68% .64% .32%
Expenses, excluding distribution fee.................................. .51% .55% .51% .19%
Net investment income................................................. 3.11% 1.87% 2.02% 3.33%
<CAPTION>
December 3,
1990(a)
Through
August 31,
1991
-----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................... $ 1.00
Net investment income and net realized gains(c).......................... .03
Dividends and distributions.............................................. (.03)
-----------
Net asset value, end of period........................................... $ 1.00
-----------
-----------
TOTAL RETURN(d):......................................................... 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................... $ 117,460
Average net assets (000)................................................. $ 89,273
Ratios to average net assets(c):
Expenses, including distribution fee.................................. .13%(b)
Expenses, excluding distribution fee.................................. .00%(b)
Net investment income................................................. 4.48%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of management fee waiver and/or expense subsidy.
(d) Total return includes reinvestment of dividends and distributions. Total
returns for periods of less than one year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-150
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New Jersey Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, New Jersey
Money Market Series, as of August 31, 1995, the related statements of operations
for the year then ended and of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the four
years in the period then ended and for the period December 3, 1990 (commencement
of investment operations) through August 31, 1991. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New Jersey Money Market Series, as of August 31, 1995, the results
of its operations, the changes in its net assets, and its financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-151
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--91.7%
- ------------------------------------------------------------------------------------------------------------------------------
Babylon Ind. Dev. Agcy. Res. Rec. Rev.,
Babylon Cmnty. Waste Mgmt. Facs., Ser. A Baa1 7.875% 7/01/06 $ 3,520(d) $ 4,015,792
Ogden Martin Sys. Inc., Ser. B Baa1 8.50 1/01/19 495 557,464
Ogden Martin Sys. Inc., Ser. C Baa1 8.50 1/01/19 3,450 3,885,356
City of New Rochelle Ind. Dev. Agcy.,
Coll. of New Rochelle BBB-(c) 6.625 7/01/12 500 508,785
Coll. of New Rochelle BBB-(c) 6.75 7/01/22 2,000 2,038,340
Dutchess Cnty. Res. Rec. Agcy. Rev.,
Solid Waste Mgmt., Ser. A, F.G.I.C. Aaa 7.50 1/01/09 1,150 1,284,481
Great Neck No. Wtr. Auth., Wtr. Sys. Rev., Ser. A A1 7.00 1/01/18 1,750(d) 1,958,390
Hempstead Town, Ser. B, F.G.I.C. Aaa 5.625 2/01/15 3,400 3,311,702
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,745 2,021,705
Jefferson Cnty. Ind. Dev. Agcy., Solid Waste Disp. Rev. Baa1 7.20 12/01/20 1,500 1,591,530
Metro. Trans. Auth. Facs. Rev.,
Commuter Facs., Ser. 7 Baa1 Zero 7/01/08 4,030 1,903,692
Commuter Facs., Ser. 7 Baa1 Zero 7/01/09 4,445 1,948,910
Commuter Facs., Ser. N, F.G.I.C. Aaa Zero 7/01/12 5,575 2,146,877
Commuter Facs., Ser. N, F.G.I.C. Aaa Zero 7/01/13 4,000 1,445,360
Trans. Facs., Ser. O Baa1 5.75 7/01/08 2,500 2,472,975
Trans. Facs., Ser. O Baa1 5.75 7/01/13 1,975 1,908,620
Nassau Cnty. Ind. Dev. Agcy. Rev., Hofstra Univ. Proj. A 8.25 7/01/03 2,500 (d) 2,773,925
New York City, Gen. Oblig.,
Ser. A Baa1 7.75 3/15/03 3,500 3,850,490
Ser. B Baa1 8.00 6/01/99 1,900 2,082,970
Ser. B Baa1 7.50 2/01/01 4,000 4,370,080
Ser. D Baa1 8.00 8/01/03 2,500 2,802,700
Ser. D Baa1 7.70 2/01/09 3,040 3,349,654
Ser. F Baa1 8.20 11/15/03 3,000 3,457,830
New York City Ind. Dev. Agcy., Spec. Fac. Rev.,
American Airlines Proj. Baa2 6.90 8/01/24 6,000 6,194,520
Term. One Group Assoc. Proj. A 6.00 1/01/15 3,000 2,899,860
Term. One Group Assoc. Proj. A 6.00 1/01/19 5,000 4,787,950
U.S.T.A. National Tennis Center Proj., F.S.A. Aaa 6.375 11/15/14 1,000 1,040,090
Y.M.C.A. Of Greater N.Y. Proj. NR 8.00 8/01/16 1,350 1,444,514
New York City Mun. Wtr. Fin. Auth. Rev.,
Wtr. & Swr. Sys., Ser. A, M.B.I.A. Aaa 7.25 6/15/15 3,000 3,405,270
Wtr. & Swr. Sys., Ser. C Aaa 7.375 6/15/13 4,000 (d) 4,635,200
New York St. Dorm. Auth. Rev., City Univ. Sys. Cons.,
Ser. A Baa1 8.125 7/01/07 3,435 3,831,742
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-152
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York St. Dorm. Auth. Rev., City Univ. Sys. Cons.,
(cont'd)
Ser. A Baa1 5.75% 7/01/13 $ 2,500 $ 2,398,875
Ser. C, F.G.I.C. Aaa 7.50 7/01/10 3,500 4,199,230
Ser. D Baa1 8.75 7/01/02 5,000 6,067,000
Ser. D Baa1 7.00 7/01/09 1,880 2,069,711
Coll. & Univ. Ed., M.B.I.A. Aaa Zero 7/01/04 2,255 1,437,811
Episcopal Hlth. Svcs., G.N.M.A. AAA(c) 7.55 8/01/29 3,000 3,266,730
Insured Mount Sinai Med. Sch., Ser. A, M.B.I.A. Aaa 5.00 7/01/13 2,945 2,648,762
Long Island Med. Ctr.,
Ser. A, F.H.A. Aa 7.625 8/15/08 2,595 2,812,746
Ser. A, F.H.A. Aa 7.75 8/15/27 4,100 4,455,839
Menorah Campus, F.H.A. AA(c) 7.40 2/01/31 2,990 3,323,176
Spec. Act. Sch. Districts, F.G.I.C. Aaa 7.00 7/01/13 3,050 3,322,426
St. Univ. Edl. Facs., Ser. A, A.M.B.A.C. Baa1 5.25 5/15/15 5,000 4,494,850
New York St. Energy Resh. & Dev. Auth. Rev.,
Brooklyn Union Gas Co., M.B.I.A. Aaa 6.75 2/01/24 2,000 2,105,020
Brooklyn Union Gas Co., Ser. D, M.B.I.A. Aaa 7.225 7/08/26 2,000 (e) 1,720,000
Con. Edison Co. Aa3 7.50 7/01/25 6,735 7,268,142
Con. Edison Co. Aa3 7.50 1/01/26 4,775 5,158,767
New York St. Environ. Facs. Corp.,
Occidental Pet. Corp. Proj. Baa3 5.70 9/01/28 2,000 1,778,720
Poll. Ctrl. Rev., St. Wtr. Revolving Fund, Ser. B Aa 7.50 3/15/11 1,300 1,432,691
Poll. Ctrl. Rev., St. Wtr. Revolving Fund, Ser. E Aa 6.50 6/15/14 1,000 1,059,960
New York St. Hsg. Fin. Agcy. Rev., Ser. A,
Multifamily Hsg. Aa 7.05 8/15/24 1,000 1,048,600
St. Univ. Constr. Aaa 8.10 11/01/10 1,000 (d) 1,137,720
St. Univ. Constr. Aaa 8.00 5/01/11 3,600 4,375,980
Svc. Contract Aaa 7.375 9/15/21 2,000 (d) 2,346,220
New York St. Local Gov't. Assistance Corp.,
Ser. B A 5.375 4/01/16 5,000 4,627,500
Ser. B A 6.25 4/01/21 2,000 2,015,700
Ser. C A Zero 4/01/14 10,000 3,327,200
Ser. E A 6.00 4/01/14 4,000 4,035,520
Ser. E A 5.25 4/01/16 4,500 4,118,670
New York St. Med. Care Facs. Fin. Agcy. Rev.,
Booth, Silvercrest & Kings Brook Hosp., Ser. A, F.H.A. Aa 7.60 2/15/29 2,750 3,030,720
Ellis & Ira Davenport Hosp., Ser. B, F.H.A. Aa 8.00 2/15/28 1,495 1,658,942
F.U.C. Insured Mtge., Ser. A, A.M.B.A.C. Aaa 6.50 8/15/29 3,000 3,122,850
Good Samaritan Hosp., Ser. A, F.H.A. Aa 7.625 2/15/23 3,500 3,804,780
Hosp. & Nursing Home, Ser. A, F.H.A. Aaa 7.70 2/15/25 1,000 (d) 1,162,790
Hosp. & Nursing Home, Ser. C, F.H.A. Aa 8.625 2/15/06 1,430 1,464,677
Long Island Coll. Hosp., Ser. A, F.H.A. AAA(c) 8.50 1/15/22 4,000 4,151,080
Long Island Coll. Hosp., Ser. B, F.H.A. Aa 8.00 2/15/08 3,000 3,330,810
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-153
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York St. Med. Care Facs. Fin. Agcy. Rev., Mental Hlth. Svcs., (cont'd)
F.G.I.C. Aaa 5.375% 2/15/14 $ 5,000 $ 4,739,250
F.G.I.C. Aaa 5.25 2/15/19 6,250 5,663,687
M.B.I.A. Aaa 6.00 8/15/02 3,000 3,229,020
Ser. A Aaa 7.50 8/15/07 2,185 (d) 2,537,812
Ser. A Baa1 7.50 8/15/07 815 883,721
Ser. A Baa1 7.75 8/15/11 135 148,001
Ser. A Aaa 7.50 2/15/21 3,135 (d) 3,641,208
St. Francis Hosp., Proj. A, F.G.I.C. Aaa 7.60 11/01/08 2,350 2,629,321
New York St. Mtge. Agcy. Rev.,
Homeowner Mtge. Aa 5.375 10/01/17 2,000 1,800,620
Homeowner Mtge. Aa 8.05 10/01/21 3,110 3,314,576
New York St. Mun. Bond Bank Agcy., Spec. Proj. Rev., Ser.
A A+(c) 6.75 3/15/11 3,000 3,186,870
New York St. Thrwy. Auth. Svc. Contract Rev.,
Local Highway & Bridge Baa1 5.875 4/01/14 1,485 1,427,337
New York St. Urban Dev. Corp. Rev.,
Correctional Cap. Facs., Ser. 5 Baa1 6.00 1/01/04 4,415 4,527,936
Correctional Cap. Facs. Baa1 Zero 1/01/08 10,000 4,834,800
Correctional Cap. Facs. Baa1 5.25 1/01/21 2,960 2,562,146
Niagara Falls Bridge Comn., Toll Bridge Sys. Rev.,
F.G.I.C. Aaa 5.25 10/01/21 2,350 2,150,673
Port Auth. of New York & New Jersey, Ser. 70 A1 7.25 8/01/25 1,000 1,077,610
Suffolk Cnty. Ind. Dev. Agcy., Southwest Swr. Sys. Rev.,
F.G.I.C. Aaa 6.00 2/01/07 1,000 1,068,170
Suffolk Cnty. Wtr. Auth., Waterworks Rev., M.B.I.A. Aaa 6.00 6/01/09 5,160 5,467,536
Triborough Bridge & Tunl. Auth. Rev.,
Ser. A, M.B.I.A. Aaa 6.00 1/01/10 2,000 2,102,140
Ser. A Aa 5.00 1/01/15 5,000 4,468,800
Ser. M Aaa 7.50 1/01/15 2,035 (d) 2,228,122
Puerto Rico Comnwlth., Gen. Oblig.,
A.M.B.A.C. Aaa 7.00 7/01/10 6,500 7,544,225
A.M.B.A.C. Aaa 5.25 7/01/18 1,000 923,650
A.M.B.A.C. Aaa 5.00 7/01/21 5,000 4,430,750
Pub. Impvt. Ref. Aaa 7.00 7/01/10 1,250 1,450,812
Puerto Rico Hsg. Fin. Auth. Rev., Single Family Baa 5.25 12/01/06 2,000 1,914,600
Puerto Rico Hwy. & Trans. Auth.,
Hwy. Rev. Ser. W Baa1 5.50 7/01/13 3,000 2,849,370
Hwy. Rev. Ser. W, F.S.A. Aaa 5.25 7/01/20 2,215 2,031,044
Hwy. Rev. Ser. X Baa1 5.50 7/01/19 3,450 3,199,530
Hwy. Rev. Ser. X, F.S.A. Aaa 5.00 7/01/22 2,940 2,599,842
Puerto Rico Pub. Bldgs. Auth. Rev. Gtd. Gov't. Facs.,
Ser. A, A.M.B.A.C. Aaa 6.25 7/01/15 850 902,938
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.617 1/25/07 7,875 7,845,469
Ser. I, M.B.I.A. Aaa 5.449 1/16/15 1,000 953,940
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-154
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund BBB(c) 7.70% 10/01/04 $ 2,500 $ 2,739,550
Hwy. Trans. Trust Fund, Ser. A NR 7.25 10/01/18 2,550 2,690,148
------------
Total long-term investments (cost $280,229,855) 299,472,213
------------
SHORT-TERM INVESTMENTS--7.5%
Babylon Ind. Dev. Agcy. Res. Rec. Rev., Ser. 89, F.R.D.D. A1+(c) 3.50 9/01/95 1,000 1,000,000
New York City, Gen. Oblig.,
Ser. 94A-4, F.R.D.D. VMIG1 3.45 9/01/95 400 400,000
Ser. A, F.R.D.D. VMIG1 3.45 9/01/95 2,200 2,200,000
New York City Hsg. Dev. Corp., E.17th St. Property,
Ser. 93A, F.R.D.D. A-1(c) 3.50 9/01/95 4,300 4,300,000
New York St. Dorm. Auth. Rev.,
St. Francis Center at the Knolls, F.R.D.D. VMIG1 3.45 9/01/95 2,600 2,600,000
New York St. Energy Resch. & Dev. Auth. Rev., F.R.D.D.,
Energy & Gas, Ser. 94B VMIG1 3.15 9/01/95 300 300,000
Niagara Mohawk Pwr. Corp., Ser. 85A A1+(c) 3.50 9/01/95 4,800 4,800,000
Niagara Mohawk Pwr. Corp., Ser. 85B P1 3.45 9/01/95 800 800,000
Niagara Mohawk Pwr. Corp., Ser. 86A P1 3.55 9/01/95 8,000 8,000,000
------------
Total short-term investments (cost $24,400,000) 24,400,000
------------
Total Investments--99.2%
(cost $304,629,855; Note 4) 323,872,213
Other assets in excess of liabilities--0.8% 2,694,687
------------
Net Assets--100% $326,566,900
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) For purposes of amortized cost valuation, the maturity date of such security is considered to be the later of the next date
on which the security can be redeemed at par or the next date on which the rate of interest is adjusted.
(c) Standard & Poor's rating.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at
period end.
</TABLE>
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-155
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $304,629,855).................................................................... $323,872,213
Interest receivable.......................................................................................... 3,417,340
Receivable for Series shares sold............................................................................ 65,397
Receivable for investments sold.............................................................................. 36,174
Prepaid expenses and other assets............................................................................ 9,660
------------
Total assets.............................................................................................. 327,400,784
------------
Liabilities
Payable for Series shares reacquired......................................................................... 369,813
Dividends payable............................................................................................ 191,114
Management fee payable....................................................................................... 123,502
Distribution fee payable..................................................................................... 82,783
Accrued expenses and other liabilities....................................................................... 65,072
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 833,884
------------
Net Assets................................................................................................... $326,566,900
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 274,187
Paid-in capital in excess of par.......................................................................... 308,048,008
------------
308,322,195
Accumulated net realized loss on investments.............................................................. (997,653)
Net unrealized appreciation on investments................................................................ 19,242,358
------------
Net assets, August 31, 1995.................................................................................. $326,566,900
------------
------------
Class A:
Net asset value and redemption price per share
($163,024,630 / 13,689,565 shares of beneficial interest issued and outstanding)....................... $11.91
Maximum sales charge (3.0% of offering price)............................................................. .37
Maximum offering price to public.......................................................................... $12.28
Class B:
Net asset value, offering price and redemption price per share
($163,012,854 / 13,684,725 shares of beneficial interest issued and outstanding)....................... $11.91
Class C:
Net asset value, offering price and redemption price per share
($529,416 / 44,444 shares of beneficial interest issued and outstanding)............................... $11.91
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-156
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest and discount earned............. $ 20,849,233
---------------
Expenses
Management fee (net of fee waiver of
$108,361)............................. 1,518,552
Distribution fee--Class A................ 95,024
Distribution fee--Class B................ 1,150,164
Distribution fee--Class C................ 2,439
Transfer agent's fees and expenses....... 183,000
Custodian's fees and expenses............ 115,000
Registration fees........................ 65,000
Legal fees............................... 40,000
Reports to shareholders.................. 33,000
Audit fee................................ 11,000
Trustees' fees........................... 3,200
Miscellaneous............................ 15,340
---------------
Total expenses........................ 3,231,719
Less: custodian fee credit............... (15,291)
---------------
Net expenses.......................... 3,216,428
---------------
Net investment income....................... 17,632,805
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions.................. 3,593
Financial futures transactions........... (428,642)
---------------
(425,049)
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 5,028,670
Financial futures contracts.............. (4,844)
---------------
5,023,826
---------------
Net gain on investments..................... 4,598,777
---------------
Net Increase in Net Assets Resulting
from Operations............................. $ 22,231,582
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
------ ------
<S> <C> <C>
Operations
Net investment income.......... $ 17,632,805 $ 18,454,581
Net realized loss on investment
transactions................ (425,049) (16,054)
Net change in unrealized
appreciation (depreciation)
of investments.............. 5,023,826 (25,211,565)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 22,231,582 (6,773,038)
------------ ------------
Dividends from net investment
income (Note 1)
Class A........................ (5,367,852) (734,832)
Class B........................ (12,248,452) (17,719,575)
Class C........................ (16,501) (174)
------------ ------------
(17,632,805) (18,454,581)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 18,761,553 41,684,512
Net asset value of shares
issued in reinvestment of
dividends................... 10,361,213 11,015,273
Cost of shares reacquired...... (52,939,335) (52,115,672)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (23,816,569) 584,113
------------ ------------
Total decrease.................... (19,217,792) (24,643,506)
Net Assets
Beginning of year................. 345,784,692 370,428,198
------------ ------------
End of year....................... $326,566,900 $345,784,692
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-157
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The New York Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state and city income taxes with the minimum
of risk by investing in ``investment grade'' tax-exempt securities and whose
ratings are within the four highest ratings categories by a nationally
recognized statistical rating organization or, if not rated, are of comparable
quality. The ability of the issuers of the securities held by the Series to meet
their obligations may be affected by economic developments in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
There were no futures contracts outstanding at August 31, 1995.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- --------------------------------------------------------------------------------
B-158
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $108,361
($0.004 per share; 0.03% of average daily net assets). The Series is not
required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $39,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $360,200 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $134,000 for the services of
PMFS. As of August 31, 1995, approximately $11,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $176,874,532 and
$219,612,500, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1995
was $304,658,055 and, accordingly, net unrealized appreciation investments for
federal income tax purposes was $19,214,158 (gross unrealized
appreciation--$19,976,506, gross unrealized depreciation--$762,348).
For federal income tax purposes, the Series had a capital loss carryforward as
of August 31, 1995 of approximately $1,041,800, of which $15,700 expires in 1999
and $1,026,100 expires in 2003. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward.
The Series elected to treat net capital losses of approximately $531,600
incurred in the ten month period ended August 31, 1994 as having occurred in the
current fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C
- --------------------------------------------------------------------------------
B-159
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
shares are sold with a contingent deferred sales charge of 1% during the first
year. Class B shares automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. A special exchange privilege is
also available for shareholders who qualified to purchase Class A shares at net
asset value.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years ended August 31,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31 1995:
Shares sold....................... 277,184 $ 3,225,910
Shares issued in reinvestment of
dividends....................... 267,148 3,155,429
Shares reacquired................. (1,006,903) (11,817,623)
----------- -------------
Net decrease in shares outstanding
before conversion............... (462,571) (5,436,284)
Shares issued upon conversion from
Class B......................... 12,985,377 149,561,617
----------- -------------
Net increase in shares
outstanding..................... 12,522,806 $ 144,125,333
----------- -------------
----------- -------------
Year ended August 31, 1994:
Shares sold....................... 568,443 $ 6,979,928
Shares issued in reinvestment of
dividends....................... 34,634 419,800
Shares reacquired................. (379,015) (4,536,278)
----------- -------------
Net increase in shares
outstanding..................... 224,062 $ 2,863,450
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold....................... 1,310,430 $ 15,158,331
Shares issued in reinvestment of
dividends....................... 627,938 7,192,642
Shares reacquired................. (3,612,951) (41,102,851)
----------- -------------
Net decrease in shares outstanding
before conversion............... (1,674,583) (18,751,878)
Shares reacquired upon conversion
into Class A.................... (12,985,377) (149,561,617)
----------- -------------
Net decrease in shares
outstanding..................... (14,659,960) $(168,313,495)
----------- -------------
----------- -------------
Year ended August 31, 1994:
Shares sold....................... 2,819,758 $ 34,553,962
Shares issued in reinvestment of
dividends....................... 873,809 10,595,424
Shares reacquired................. (3,939,794) (47,570,423)
----------- -------------
Net decrease in shares
outstanding..................... (246,227) $ (2,421,037)
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold....................... 32,796 $ 377,312
Shares issued in reinvestment of
dividends....................... 1,131 13,142
Shares reacquired................. (1,612) (18,861)
----------- -------------
Net increase in shares
outstanding..................... 32,315 $ 371,593
----------- -------------
----------- -------------
August 1, 1994(a) through
August 31, 1994:
Shares sold....................... 12,897 $ 150,622
Shares issued in reinvestment of
dividends....................... 4 49
Shares reacquired................. (772) (8,971)
----------- -------------
Net increase in shares
outstanding..................... 12,129 $ 141,700
----------- -------------
----------- -------------
- ---------------
(a) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-160
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended August 31,
------------------------------------------------------
1995 1994 1993 1992 1991
-------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............. $ 11.71 $ 12.54 $ 11.75 $11.08 $10.62
-------- ------- ------- ------ ------
Income from investment operations
Net investment income.......................... .66(a) .67 .70 .71 .72
Net realized and unrealized gain (loss) on
investment transactions..................... .20 (.83) .79 .67 .46
-------- ------- ------- ------ ------
Total from investment operations............ .86 (.16) 1.49 1.38 1.18
Less dividends
Dividends from net investment income........... (.66) (.67) (.70) (.71) (.72)
-------- ------- ------- ------ ------
Net asset value, end of year................... $ 11.91 $ 11.71 $ 12.54 $11.75 $11.08
-------- ------- ------- ------ ------
-------- ------- ------- ------ ------
TOTAL RETURN(b):............................... 7.70% (1.38)% 13.06% 12.73% 11.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................. $163,025 $13,661 $11,821 $6,057 $2,729
Average net assets (000)....................... $ 95,024 $13,454 $ 8,755 $4,024 $1,579
Ratios to average net assets:
Expenses, including distribution fees....... .69%(a) .74% .74% .74% .71%
Expenses, excluding distribution fees....... .59%(a) .64% .64% .64% .61%
Net investment income....................... 5.65%(a) 5.46% 5.78% 6.19% 6.61%
Portfolio turnover rate........................ 57% 49% 44% 45% 78%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes reinvestment of dividends.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-161
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
------------------------------------------------------------ Year
Year Ended August 31, Ended
------------------------------------------------------------ August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $ 11.71 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $11.71
-------- -------- -------- -------- -------- -------
Income from investment operations
Net investment income.......................... .61(a) .62 .65 .66 .67 .58(a)
Net realized and unrealized gain (loss) on
investment transactions...................... .20 (.83) .79 .67 .46 .20
-------- -------- -------- -------- -------- -------
Total from investment operations............ .81 (.21) 1.44 1.33 1.13 .78
Less dividends
Dividends from net investment income........... (.61) (.62) (.65) (.66) (.67) (.58)
-------- -------- -------- -------- -------- -------
Net asset value, end of period................. $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $11.91
-------- -------- -------- -------- -------- -------
-------- -------- -------- -------- -------- -------
TOTAL RETURN(b):............................... 7.27% (1.77)% 12.61% 12.32% 10.96% 7.01%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $163,013 $331,982 $358,607 $316,472 $293,942 $ 529
Average net assets (000)....................... $230,033 $350,564 $330,823 $303,016 $295,285 $ 325
Ratios to average net assets:
Expenses, including distribution fees....... 1.11%(a) 1.14% 1.14% 1.14% 1.11% 1.36%(a)
Expenses, excluding distribution fees....... .61%(a) .64% .64% .64% .61% .61%(a)
Net investment income....................... 5.30%(a) 5.06% 5.38% 5.79% 6.21% 5.05%(a)
Portfolio turnover rate........................ 57% 49% 44% 45% 78% 57%
<CAPTION>
August 1,
Through
August 31,
1994
<S> <C>
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........... $11.74
-----
Income from investment operations
Net investment income.......................... .04
Net realized and unrealized gain (loss) on
investment transactions...................... (.03)
-----
Total from investment operations............ .01
Less dividends
Dividends from net investment income........... (.04)
-----
Net asset value, end of period................. $11.71
-----
-----
TOTAL RETURN(b):............................... 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................ $ 142
Average net assets (000)....................... $ 42
Ratios to average net assets:
Expenses, including distribution fees....... 1.62%(c)
Expenses, excluding distribution fees....... .87%(c)
Net investment income....................... 5.17%(c)
Portfolio turnover rate........................ 49%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-162
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW YORK SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, New York
Series, as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New York Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-163
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Albany City Sch. Dist., Ser. 95, B.A.N. NR 4.50% 5/03/96 $ 2,000 $ 2,002,175
Amherst Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co., Ser.
85, S.O.T. A-1+(c) 4.35 11/01/95 3,100 3,100,000
Babylon, Gen. Oblig., Ser. 94B, F.R.W.D., A.M.B.A.C. VMIG1 3.20 9/06/95 4,700 4,700,000
Babylon Ind. Dev. Agcy. Rev., Res. Rec. Rev., Ser. 89,
F.R.D.D. A-1+(c) 3.50 9/01/95 6,500 6,500,000
Battery Park Auth. Rev., Ser. 90, F.R.W.D. A-1(c) 3.80 9/06/95 5,000 5,000,000
Commack Union Free Sch. Dist., Ser. 95, T.A.N. NR 4.25 6/28/96 2,500 2,509,916
East Islip Union Free Sch. Dist., Ser. 95, T.A.N. NR 4.50 6/28/96 7,110 7,144,911
Farmingdale Union Free Sch. Dist., Ser. 95, T.A.N. NR 4.25 6/27/96 3,675 3,684,313
Franklinville Central Sch. Dist., Ser 93, F.R.W.D. NR 3.75 9/07/95 4,250 4,250,000
Guilderland Ind. Dev. Agcy. Rev., Northeastern Ind'l.
Park, Ser. 93A, F.R.W.D. P-1 3.50 9/06/95 1,500 1,500,000
Monroe Cnty. Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co.,
Ser. 84, S.O.T. A-1+(c) 3.85 9/01/95 7,000 7,000,000
Mt. Pleasant Ind. Dev. Agcy. Rev., Poll. Ctrl. Rev., Gen.
Motors Corp. Proj., F.R.W.D. VMIG2 3.70 9/06/95 6,095 6,095,000
Nassau Cnty., Gen. Oblig., Ser. 95B, R.A.N. SP-1(c) 4.25 3/15/96 4,000 4,010,443
Nassau Cnty., Ser. 95F, B.A.N. MIG1 4.50 3/15/96 4,980 4,994,346
New York City, Gen. Oblig.,
Ser. 94A-4, F.R.D.D. VMIG1 3.45 9/01/95 1,800 1,800,000
Ser. 95, F.R.D.D., M.B.I.A. VMIG1 3.40 9/01/95 800 800,000
Ser. 95, T.A.N. MIG1 4.50 2/15/96 8,000 8,030,247
Ser. 95B-9, T.E.C.P. VMIG1 3.70 10/03/95 2,900 2,900,000
Ser. 95F-3, F.R.W.D. VMIG1 3.60 9/06/95 6,300 6,300,000
Ser. 95F-5, F.R.W.D. VMIG1 3.55 9/06/95 700 700,000
New York City Hsg. Dev. Corp.,
E.17th St. Property, Ser. 93A, F.R.D.D. A-1(c) 3.50 9/01/95 4,600 4,600,000
James Tower Proj., Ser. 94A, F.R.W.D. A-1(c) 3.40 9/06/95 4,200 4,200,000
Related E. 96th St. Proj., Ser. 90A, F.R.W.D. VMIG1 3.50 9/07/95 13,500 13,500,000
New York City Ind. Dev. Agcy. Rev.,
Japan Airlines, Ser. 91, F.R.D.D. A-1+(c) 3.65 9/01/95 15,200 15,200,000
Viola Bakeries, Ser. 90, F.R.W.D. VMIG1 3.60 9/06/95 2,650 2,650,000
New York City Mun. Water Fin. Auth., Water & Sew. Rev.,
Ser. 9-3, T.E.C.P. VMIG1 3.55 9/20/95 3,000 3,000,000
Ser. 9-3, T.E.C.P. P-1 3.75 10/13/95 1,500 1,500,000
Ser. 9-3, T.E.C.P. P-1 3.80 12/15/95 4,000 4,000,000
New York City Unltd. Tax Rev., JPM Putters, Ser. 33,
F.R.W.D., M.B.I.A. VMIG1 3.55 9/07/95 3,100 3,100,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-164
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
New York St., Gen. Oblig., Ser. P, T.E.C.P. P-1 3.75% 10/05/95 $ 4,800 $ 4,800,000
New York St. Dorm. Auth. Rev.,
Mem. Sloan Kettering, Ser. 89A, T.E.C.P. VMIG1 3.10 9/21/95 4,500 4,500,000
Miriam Osborn Memorial Home, F.R.W.D. VMIG1 3.30 9/06/95 4,700 4,700,000
Rockefeller Univ., Ser. 91A, F.R.W.D. Aaa 3.76 9/06/95 13,600 13,600,000
St. Francis Center at the Knolls, F.R.D.D. VMIG1 3.45 9/01/95 4,000 4,000,000
New York St. Energy Res. & Dev. Auth.,
Long Island Ltg. Co. Proj.,
Ser. 85B, A.M.T. VMIG1 4.70 3/01/96 7,500 7,500,000
Ser. 95A, F.R.W.D. VMIG1 3.30 9/06/95 5,000 5,000,000
New York St. Elec. & Gas Co., Ser. 84A, A.M.T. A-1+(c) 4.60 12/01/95 4,000 4,000,000
Niagara Mohawk Pwr. Corp.,
Ser. 85B, F.R.D.D. P-1 3.45 9/01/95 500 500,000
Ser. 85C, F.R.D.D. P-1 3.45 9/01/95 2,600 2,600,000
Ser. 86A, F.R.D.D. P-1 3.55 9/01/95 9,500 9,500,000
Pollution Control Rev.,
Ser. 85A, A.O.T. A-1+(c) 4.65 3/15/96 2,000 2,000,000
Ser. 85B, A.O.T. Aaa 4.10 10/15/95 3,250 3,250,000
New York St. Hsg. Fin. Auth., Liberty View Apts.,
Ser. 85A, F.R.W.D. VMIG1 3.60 9/06/95 5,400 5,400,000
New York St. Job Dev. Auth., F.R.M.D.,
Ser. 84D VMIG1 3.70 9/01/95 1,655 1,655,000
Ser. 84E VMIG1 3.70 9/01/95 3,900 3,900,000
Ser. 84F VMIG1 3.70 9/01/95 1,525 1,525,000
Ser. 86C VMIG1 3.80 9/01/95 1,185 1,185,000
New York St. Local Gov't. Assistance Corp.,
Ser. 95E, F.R.W.D. VMIG1 3.50 9/06/95 3,000 3,000,000
Ser. 95F, F.R.W.D. VMIG1 3.35 9/06/95 12,400 12,400,000
New York St. Power Auth. Rev., S.M.T. MIG1 3.85 9/01/95 10,000 10,000,000
New York St. Thruway Auth. Rev., Ser. C, F.R.W.D.,
F.G.I.C. NR 3.70 9/07/95 7,000 7,000,000
New York St. Urban Dev. Corp. Rev.,
Ser. 86 Aaa 8.00 1/01/96 2,500 2,540,609
Ser. B Aaa 8.00 1/01/96 5,000 5,156,148
Niagara Cnty. Ind. Dev. Agcy. Rev., Gen. Abrasive
Treibacher,
Ser. 91, F.R.W.D. P-1 3.65 9/06/95 4,600 4,600,000
Oswego Cnty. Ind. Dev. Agcy. Rev., Philip Morris Co., Ser.
92, F.R.W.D. P-1 3.65 9/06/95 6,300 6,300,000
Oyster Bay, Gen. Oblig.,
Ser. 94, B.A.N. NR 4.85 12/08/95 2,000 1,999,370
Ser. 94, B.A.N. NR 5.00 12/08/95 3,000 3,000,597
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-165
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Port Auth. of New York & New Jersey, Kiac Partners,
Ser. 3-2, F.R.W.D. VMIG1 3.40% 9/06/95 $ 6,200 $ 6,200,000
Ser. 3-3, F.R.W.D. VMIG1 3.40 9/06/95 4,500 4,500,000
Spec. Oblig. Rev.,
Ser.1, F.R.D.D. VMIG1 3.45 9/01/95 2,500 2,500,000
Ser. 93-1, F.R.W.D. NR 3.627 9/05/95 12,000 12,000,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 95,
T.E.C.P. A-1+(c) 3.60 9/11/95 7,700 7,700,000
Rockland Cnty., Ser. 95, B.A.N NR 5.50 3/08/96 2,000 2,009,239
Sayville Union Free Sch. Dist., Ser. 95, T.A.N. MIG1 4.25 6/27/96 6,500 6,526,710
St. Lawrence Cnty. Ind. Dev. Agcy. Rev.,
Clarkson Univ. Proj., Ser. 90, F.R.W.D. VMIG1 3.80 9/07/95 2,700 2,700,000
Reynolds Metals, F.R.D.D. P-1 3.35 9/01/95 1,000 1,000,000
Reynolds Metals, Ser. 95, F.R.W.D. VMIG1 3.50 9/06/95 3,000 3,000,000
United Nations Dev. Corp. Rev., Phase 2 & 3 Sr. Lien Aaa 7.875 7/01/96 4,000 4,204,061
Westchester Cnty., T.A.N. NR 5.00 12/14/95 7,000 7,009,650
Yates Cnty. Ind. Dev. Agcy. Rev., Clearplass Containers
Inc.,
Ser. 92A, F.R.W.D. A-1(c) 3.75 9/07/95 1,455 1,455,000
------------
Total Investments--102.0%
(amortized cost--$331,187,735(d)) 331,187,735
Liabilities in excess of other assets--(2.0)% (6,490,118)
------------
Net Assets--100% $324,697,617
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Annual Mandatory Tender (b).
A.O.T.--Annual Optional Tender (b).
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.M.D.--Floating Rate (Monthly) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
M.B.I.A.--Municipal Bond Insurance Association.
R.A.N.--Revenue Anticipation Note.
S.M.T.--Semi-Annual Mandatory Tender (b).
S.O.T.--Semi-Annual Optional Tender (b).
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of such
securities is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's rating.
(d) The cost of securities for federal income tax purposes is substantially
the same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-166
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $331,187,735
Receivable for investments sold.............................................................................. 14,312,795
Receivable for Series shares sold............................................................................ 2,544,647
Interest receivable.......................................................................................... 2,064,757
Deferred expenses and other assets........................................................................... 7,167
------------
Total assets.............................................................................................. 350,117,101
------------
Liabilities
Payable for investments purchased............................................................................ 17,000,000
Payable for Series shares reacquired......................................................................... 8,009,423
Accrued expenses and other liabilities....................................................................... 143,748
Management fee payable....................................................................................... 137,878
Dividends payable............................................................................................ 111,421
Distribution fee payable..................................................................................... 15,414
Deferred trustee fees........................................................................................ 1,600
------------
Total liabilities......................................................................................... 25,419,484
------------
Net Assets................................................................................................... $324,697,617
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 3,246,976
Paid-in capital in excess of par.......................................................................... 321,450,641
------------
Net assets, August 31, 1995.................................................................................. $324,697,617
------------
------------
Net asset value, offering price and redemption price per share ($324,697,617 / 324,697,617
shares of beneficial interest issued and outstanding; unlimited number of shares authorized).............. $1.00
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-167
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................... $ 10,956,553
---------------
Expenses
Management fee............................. 1,463,815
Distribution fee........................... 365,954
Transfer agent's fees and expenses......... 137,000
Custodian's fees and expenses.............. 80,000
Reports to shareholders.................... 40,000
Registration fees.......................... 16,000
Audit fee.................................. 10,500
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 11,886
---------------
Total expenses.......................... 2,138,355
Less: custodian fee credit................. (35,560)
---------------
Net expenses............................ 2,102,795
---------------
Net investment income......................... 8,853,758
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 8,853,758
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income....... $ 8,853,758 $ 4,997,969
--------------- -------------
Net increase in net assets
resulting from
operations............... 8,853,758 4,997,969
--------------- -------------
Dividends to shareholders...... (8,853,758) (4,997,969)
--------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold..................... 1,099,424,608 956,452,031
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................ 8,564,122 4,807,678
Cost of shares reacquired... (1,052,364,310) (978,490,262)
--------------- -------------
Net increase (decrease) in
net assets from Series
share transactions....... 55,624,420 (17,230,553)
--------------- -------------
Total increase (decrease)...... 55,624,420 (17,230,553)
Net Assets
Beginning of year.............. 269,073,197 286,303,750
--------------- -------------
End of year.................... $ 324,697,617 $ 269,073,197
--------------- -------------
--------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-168
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The New York Money Market Series (the
``Series'') commenced investment operations in April, 1985. The Series is
diversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New York State, New York City and
federal income taxes with a minimum of risk by investing in ``investment grade''
tax-exempt securities having a maturity of thirteen months or less whose ratings
are within the two highest ratings categories by two nationally recognized
statistical rating organizations, or if not rated, are of comparable quality.
The ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations Portfolio securities of the Series are valued at amortized
cost, which approximates market value. The amortized cost method of valuation
involves valuing a security at its cost on the date of purchase and thereafter
assuming a constant amortization to maturity of any discount or premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes For federal income tax purposes, each series in the Fund is
treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends are made monthly.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''). To reimburse PMFD for its expenses incurred pursuant to a plan
of distribution, the Series pays PMFD a reimbursement, accrued daily and payable
monthly, at an annual rate of .125 of 1% of the Series' average daily net
assets. PMFD pays various broker-dealers, including Prudential Securities
Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $126,000 for the services of PMFS. As
of August 31, 1995, approximately $10,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-169
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1995 1994 1993 1992
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains................................ .03 .02 .02 .03
Dividends and distributions to shareholders................................. (.03) (.02) (.02) (.03)
-------- -------- -------- --------
Net asset value, end of year................................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(a):............................................................ 3.06% 1.80% 1.80% 2.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................... $324,698 $269,073 $286,304 $249,785
Average net assets (000).................................................... $292,763 $280,492 $275,640 $248,557
Ratios to average net assets:
Expenses, including distribution fee...................................... .73% .77% .75% .76%
Expenses, excluding distribution fee...................................... .61% .64% .63% .63%
Net investment income..................................................... 3.02% 1.78% 1.75% 2.83%
<CAPTION>
1991
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................................... $ 1.00
Net investment income and net realized gains................................ .04
Dividends and distributions to shareholders................................. (.04)
--------
Net asset value, end of year................................................ $ 1.00
--------
--------
TOTAL RETURN(a):............................................................ 4.37%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................... $236,361
Average net assets (000).................................................... $245,494
Ratios to average net assets:
Expenses, including distribution fee...................................... .79%
Expenses, excluding distribution fee...................................... .66%
Net investment income..................................................... 4.23%
</TABLE>
- ---------------
(a) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-170
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, New York Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, New York
Money Market Series, as of August 31, 1995, the related statements of operations
for the year then ended and of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New York Money Market Series, as of August 31, 1995, the results of
its operations, the changes in its net assets, and its financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-171
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--93.7%
- ------------------------------------------------------------------------------------------------------------------------------
Buncombe Cnty., Pub. Impvt. Bonds, Aa 6.90% 3/01/09 $ 1,000 (d) $ 1,101,560
City of Greensboro Enterprise Sys. Rev., Comb Ser. A A1 5.30 6/01/15 1,000 932,660
Charlotte, Cert. of Part.,
Conv. Fac. Proj., A.M.B.A.C. Aaa Zero 12/01/09 3,000 1,330,050
Conv. Fac. Proj., A.M.B.A.C. Aaa 5.00 12/01/21 4,000 3,561,040
Charlotte Mecklenberg Hosp., Hlth. Care Sys. Rev., Aa 6.25 1/01/20 750 763,553
Charlotte Wtr. & Swr., Aaa 6.20 6/01/17 1,500 1,546,530
Charlotte Wtr. & Swr., Aaa 5.90 2/01/19 1,000 1,019,110
Cleveland Cnty., Ser. 1993, F.G.I.C. Aaa 5.10 6/01/07 2,500 2,493,225
Concord Util. Sys. Rev., M.B.I.A. Aaa 5.50 12/01/14 1,000 978,990
Dare Cnty., Util. Sys. Rev., M.B.I.A. Aaa 5.75 6/01/14 500 495,415
Davidson Cnty. Aa 5.40 6/01/14 800 768,936
Durham Cnty., Pub. Impvt., Aaa 4.60 5/01/04 2,000 1,974,540
Fayetteville, Cert. of Part., San. Swr. & Pub. Impvt.,
A.M.B.A.C. Aaa 6.875 12/01/08 1,750 1,891,925
Gastonia, Gen. Oblig., Wtr. Sys. & St. Impvt., F.G.I.C. Aaa 5.25 4/01/09 1,625 1,597,066
Guilford Cnty., Pub. Impvt., Aa1 5.40 4/01/09 500 505,735
Lincoln Cnty. Gen. Oblig., Ref., F.G.I.C. Aaa 5.10 6/01/09 1,170 1,136,140
Martin Cnty. Ind. Facs. & Poll. Ctrl. Fin. Auth. Rev.,
Weyerhaueser Co. Proj., A2 8.50 6/15/99 200 228,156
Mecklenberg Cnty., Pub. Impvt., Aaa 5.00 4/01/08 1,000 988,000
New Hanover Cnty. Hosp. Rev., Regl. Med. Ctr. Proj.,
A.M.B.A.C. Aaa 4.75 10/01/23 1,600 1,328,048
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev., A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,018,470
Pwr. Sys. Rev., E.T.M. Aaa 6.50 1/01/18 1,995 2,200,326
Pwr. Sys. Rev., A 6.50 1/01/18 1,005 1,004,879
Pwr. Sys. Rev., Aaa 6.00 1/01/26 650 (d) 676,351
Pwr. Sys. Rev., Ser. A A 6.40 1/01/21 1,000 987,530
Pwr. Sys. Rev., Ser. A, A.M.B.A.C. Aaa 7.625 1/01/22 1,000 (d) 1,097,660
No. Carolina Gen. Oblig. Cap. Impvt., Ser. A Aaa 4.70 2/01/10 1,200 1,104,108
No. Carolina Hsg. Fin. Agcy., Sngl. Fam. Mtge. Rev., Ser. G Aa 7.80 3/01/21 790 843,309
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-172
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
No. Carolina Med. Care Comn., Hlth. Care Facs. Rev.,
Stanley Mem. Hosp. Proj., Baa1 7.80% 10/01/19 $ 650 $ 686,719
No. Carolina Med. Care Comn., Hosp. Rev.,
Alamance Hlth. Serv. Inc., F.S.A. Aaa 5.50 8/15/24 2,000 1,876,340
Annie Pen Mem. Hosp. Proj., Baa 7.50 8/15/21 1,000 1,028,880
Baptist Hosp. Proj., Aa 6.00 6/01/22 1,000 981,600
Carolina Medicorp Proj., Aa 6.00 5/01/21 1,500 1,500,555
Rex Hosp. Proj., A1 6.25 6/01/17 1,750 1,797,985
Scotland Mem. Hosp., Ser. 88 Baa 8.625 10/01/11 1,000 (d) 1,140,180
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev., A 5.25 1/01/09 1,000 955,580
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.00 1/01/10 1,250 1,302,475
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.72 1/01/12 2,000 (e) 1,810,000
Northern Hosp. Dist. Surry Cnty. Hlth. Care Facs. Rev.,
No. Carolina Hosp., Ba1 7.875 10/01/21 1,500 1,568,085
Piedmont Triad Arpt. Auth., M.B.I.A. Aaa 5.00 7/01/16 1,000 895,540
Puerto Rico Comnwlth.,
Ser. A, M.B.I.A. Aaa 6.25 7/01/10 1,240 1,301,603
Gen. Oblig., M.B.I.A. Aaa 5.50 7/01/13 1,750 1,701,438
Gen. Oblig., F.S.A. Aaa 7.723 7/01/20 1,300 (e) 1,272,375
Pub. Impt., M.B.I.A. Aaa 5.375 7/01/22 1,520 1,420,744
Puerto Rico Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev.,
Ser. 1-B, G.N.M.A. Aaa 7.65 10/15/22 665 708,943
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Facs.,
Upjohn Co. Proj., Aa3 7.50 12/01/23 500 554,905
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.617 1/25/07 1,000 (e) 996,250
Robeson Cnty., Aaa 7.80 6/01/09 500 d)(f) 557,655
Union Cnty. Wtr. & Swr., Solid Waste Rev., A1 6.50 4/01/07 850 912,653
Univ. of Puerto Rico Sys. Rev., Ser. M, M.B.I.A. Aaa 5.25 6/01/25 1,000 914,470
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund, Ser. A, NR 7.25 10/01/18 700 738,472
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91, NR 7.75 10/01/06 440 479,459
Wake Cnty. Hosp. Rev., M.B.I.A. Aaa 5.125 10/01/26 1,500 1,340,085
Winston Salem, Sngl. Fam. Mtge. Rev., A1 8.00 9/01/07 445 466,169
-----------
Total long-term investments (cost $60,882,863) 62,482,472
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-173
<PAGE>
Portfolio of Investments as PRUDENTIAL MUNICIPAL SERIES FUND
of August 31, 1995 NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--5.2%
Halifax Cnty. Ind. Facs. & Poll. Ctrl.,
Westmoreland L.G. & E. Partners, Ser. 93, F.R.D.D. A-1(c) 3.65% 9/01/95 $ 2,600 $ 2,600,000
Westmoreland-Hadson Roano, Ser. 91, F.R.D.D. CPS1 3.70 9/01/95 600 600,000
Puerto Rico Comnwlth., Gov't. Dev. Bank., Ser. 85, F.R.W.D. VMIG1 3.20 9/06/95 300 300,000
-----------
Total short-term investments (cost $3,500,000) 3,500,000
-----------
Total Investments--98.9%
(cost $64,382,863) 65,982,472
Other assets in excess of liabilities--1.1% 708,959
-----------
Net Assets--100% $66,691,431
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
E.T.M..--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Association.
F.R.D.D.--Flating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity date of these
securities are considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
(f) Entire principal amount pledged as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-174
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $64,382,863)...................................................................... $65,982,472
Interest receivable........................................................................................... 973,437
Deferred expenses and other assets............................................................................ 2,390
-----------
Total assets............................................................................................... 66,958,299
-----------
Liabilities
Bank overdraft................................................................................................ 35,206
Payable for Fund shares reacquired............................................................................ 107,106
Dividends payable............................................................................................. 34,673
Due to Manager................................................................................................ 25,233
Accrued expenses.............................................................................................. 23,472
Due to broker-variation margin................................................................................ 20,313
Due to Distributors........................................................................................... 19,265
Deferred Trustees' fees....................................................................................... 1,600
-----------
Total liabilities.......................................................................................... 266,868
-----------
Net Assets.................................................................................................... $66,691,431
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 59,607
Paid-in capital in excess of par........................................................................... 64,482,173
-----------
64,541,780
Accumulated net realized gain on investments............................................................... 497,855
Net unrealized appreciation on investments................................................................. 1,651,796
-----------
Net assets, August 31, 1995................................................................................... $66,691,431
-----------
-----------
Class A:
Net asset value and redemption price per share
($26,518,740 / 2,370,820 shares of beneficial interest issued and outstanding).......................... $11.19
Maximum sales charge (3% of offering price)................................................................ .35
-----------
Maximum offering price to public........................................................................... $11.54
-----------
-----------
Class B:
Net asset value, offering price and redemption price per share
($40,119,072 / 3,585,058 shares of beneficial interest issued and outstanding).......................... $11.19
-----------
-----------
Class C:
Net asset value, offering price and redemption price per share
($53,619 / 4,791 shares of beneficial interest issued and outstanding).................................. $11.19
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-175
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................. $ 4,291,640
---------------
Expenses
Management fee, net waiver of $22,350.... 313,847
Distribution fee--Class A................ 15,244
Distribution fee--Class B................ 259,815
Distribution fee--Class C................ 241
Custodian's fees and expenses............ 90,000
Reports to shareholders.................. 56,000
Transfer agent's fees and expenses....... 42,000
Registration fees........................ 36,000
Audit fee................................ 11,000
Legal fees............................... 10,000
Trustee's Fees........................... 3,200
Miscellaneous............................ 11,614
---------------
Total expenses........................ 848,961
Less: custodian fee credit............... (8,596)
---------------
Net expenses.......................... 840,365
---------------
Net investment income....................... 3,451,275
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 914,738
Financial futures contract
transactions.......................... (239,013)
---------------
675,725
---------------
Net change in unrealized
appreciation/depreciation on:
Investments.............................. (172,563)
Financial futures contract............... 42,188
---------------
(130,375)
---------------
Net gain on investments..................... 545,350
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 3,996,625
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income........... $ 3,451,275 $ 3,711,296
Net realized gain on investment
transactions................. 675,725 276,064
Net change in unrealized
appreciation/depreciation of
investments.................. (130,375) (5,436,522)
----------- ------------
Net increase (decrease) in net
assets resulting from
operations................... 3,996,625 (1,449,162)
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A...................... (800,554) (109,844)
Class B...................... (2,649,245) (3,601,431)
Class C...................... (1,476) (21)
----------- ------------
(3,451,275) (3,711,296)
----------- ------------
Distributions from net realized
gains
Class A...................... -- (33,123)
Class B...................... -- (1,379,190)
----------- ------------
-- (1,412,313)
----------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares sold... 4,576,741 9,251,532
Net asset value of shares issued
in reinvestment of dividends
and distributions............ 1,814,783 2,641,848
Cost of shares reacquired....... (11,959,150) (10,898,454)
----------- ------------
Net increase (decrease) in net
assets from Series share
transactions................. (5,567,626) 994,926
----------- ------------
Total decrease..................... (5,022,276) (5,577,845)
Net Assets
Beginning of year.................. 71,713,707 77,291,552
----------- ------------
End of year........................ $66,691,431 $ 71,713,707
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-176
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The North Carolina Series (the ``Series'')
commenced investment operations in February, 1985. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Fund values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss until the contracts expire or are closed, at which time
the gain or loss is reclassified to realized gain or loss. The Series invests in
financial futures contracts solely for the purpose of hedging its existing
portfolio securities, or securities the Series intends to purchase against
fluctuations in value caused by changes in prevailing market conditions. Should
market conditions move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
short-term capital gains and market discount.
- --------------------------------------------------------------------------------
B-177
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $22,350
($0.004 per share for Class A, B and C shares; .033% of average net assets). The
Series is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $12,600 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1995, it received
approximately $97,900 and $100 in contingent deferred sales charges imposed upon
certain redemptions by Class B and Class C shareholders, respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the year ended August 31,
1995, the Series incurred fees of approximately $28,400 for the services of
PMFS. As of August 31, 1995, approximately $2,300 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995 were $18,001,985 and
$27,107,030, respectively.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of August 31,
1995, net unrealized appreciation for federal income tax purposes was $1,599,609
(gross unrealized appreciation--$2,305,476; gross unrealized
depreciation--$705,867).
As of August 31, 1995, the Series sold 500 financial futures contracts on the
Municipal Bond Index expiring in September 1995. The value at disposition of
such contracts is $5,774,062. The value of such contracts on August 31, 1995 was
$5,721,875, thereby resulting in an unrealized gain of $52,187.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the
- --------------------------------------------------------------------------------
B-178
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
first year. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended August
31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 101,495 $ 1,107,658
Shares issued in reinvestment of
dividends......................... 40,041 444,345
Shares reacquired................... (219,838) (2,440,629)
---------- ------------
Net decrease in shares outstanding
before conversion................. (78,302) (888,626)
Shares issued upon conversion from
Class B........................... 2,245,102 24,527,190
---------- ------------
Net increase in shares
outstanding....................... 2,166,800 $ 23,638,564
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 81,115 $ 947,875
Shares issued in reinvestment of
dividends and distributions....... 8,558 98,262
Shares reacquired................... (33,172) (382,692)
---------- ------------
Net increase in shares
outstanding....................... 56,501 $ 663,445
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 313,714 $ 3,421,366
Shares issued in reinvestment of
dividends......................... 126,657 1,369,272
Shares reacquired................... (889,076) (9,511,942)
---------- ------------
Net decrease in shares outstanding
before conversion................. (448,705) (4,721,304)
Shares reacquired upon conversion
into Class A...................... (2,245,029) (24,527,190)
---------- ------------
Net decrease in shares
outstanding....................... (2,693,734) $(29,248,494)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 711,751 $ 8,293,464
Shares issued in reinvestment of
dividends and distributions....... 220,668 2,543,573
Shares reacquired................... (920,864) (10,515,762)
---------- ------------
Net increase in shares
outstanding....................... 11,555 $ 321,275
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 4,353 $ 47,717
Shares issued in reinvestment of
dividends......................... 105 1,166
Shares reacquired................... (592) (6,579)
---------- ------------
Net increase in shares
outstanding....................... 3,866 $ 42,304
---------- ------------
---------- ------------
August 1, 1994* through
August 31, 1994:
Shares sold......................... 924 $ 10,193
Shares issued in reinvestment of
dividends......................... 1 13
---------- ------------
Net increase in shares
outstanding....................... 925 $ 10,206
---------- ------------
---------- ------------
- ------------------
* Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-179
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.06 $12.04 $11.37 $10.86 $10.45
------- ------ ------ ------ ------
Income from investment operations
Net investment income......................... .60(a) .61 .65 .67 .67
Net realized and unrealized gain (loss) on
investment transactions..................... .13 (.76) .67 .51 .41
------- ------ ------ ------ ------
Total from investment operations............ .73 (.15) 1.32 1.18 1.08
------- ------ ------ ------ ------
Less distributions
Dividends from net investment income.......... (.60) (.61) (.65) (.67) (.67)
Distributions from net realized gains......... -- (.22) -- -- --
------- ------ ------ ------ ------
Total distributions......................... (.60) (.83) (.65) (.67) (.67)
------- ------ ------ ------ ------
Net asset value, end of year.................. $ 11.19 $11.06 $12.04 $11.37 $10.86
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):.............................. 6.86% (1.35)% 11.99% 11.12% 10.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $26,519 $2,256 $1,777 $ 917 $ 362
Average net assets (000)...................... $15,244 $2,067 $1,316 $ 612 $ 246
Ratios to average net assets:
Expenses, including distribution fees....... .98%(a) .88% .87% .91% .99%
Expenses, excluding distribution fees....... .88%(a) .78% .77% .81% .89%
Net investment income....................... 5.25%(a) 5.31% 5.55% 5.90% 6.24%
Portfolio turnover rate....................... 28% 17% 38% 36% 27%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-180
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- ----------
Year
Year Ended August 31, Ended
------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
------- ------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $11.06
------- ------- ------- ------- ------- -----
Income from investment operations
Net investment income......................... .55(a) .56 .60 .62 .63 .52(a)
Net realized and unrealized gain (loss) on
investment transactions..................... .13 (.77) .68 .51 .41 .13
------- ------- ------- ------- ------- -----
Total from investment operations............ .68 (.21) 1.28 1.13 1.04 .65
------- ------- ------- ------- ------- -----
Less distributions
Dividends from net investment income.......... (.55) (.56) (.60) (.62) (.63) (.52)
Distributions from net realized gains......... -- (.22) -- -- -- --
------- ------- ------- ------- ------- -----
Total distributions......................... (.55) (.78) (.60) (.62) (.63) (.52)
------- ------- ------- ------- ------- -----
Net asset value, end of period................ $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 10.86 $11.19
------- ------- ------- ------- ------- -----
------- ------- ------- ------- ------- -----
TOTAL RETURN(b):.............................. 6.44% (1.82)% 11.62% 10.64% 10.17% 6.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $40,119 $69,448 $75,515 $63,573 $59,875 $ 53
Average net assets (000)...................... $51,963 $73,606 $67,997 $60,751 $59,071 $ 32
Ratios to average net assets:
Expenses, including distribution fees....... 1.34%(a) 1.28% 1.27% 1.31% 1.39% 1.63%(a)
Expenses, excluding distribution fees....... .84%(a) .78% .77% .81% .89% .88%(a)
Net investment income....................... 5.10%(a) 4.89% 5.18% 5.58% 5.88% 4.59%(a)
Portfolio turnover rate....................... 28% 17% 38% 36% 27% 28%
<CAPTION>
<S> <C>
August 1,
1994(d)
through
August 31,
1994
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $11.09
-----
Income from investment operations
Net investment income......................... .04(c)
Net realized and unrealized gain (loss) on
investment transactions..................... (.03)
-----
Total from investment operations............ .01
-----
Less distributions
Dividends from net investment income.......... (.04)
Distributions from net realized gains......... --
-----
Total distributions......................... (.04)
-----
Net asset value, end of period................ $11.06
-----
-----
TOTAL RETURN(b):.............................. .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 10
Average net assets (000)...................... $ 5
Ratios to average net assets:
Expenses, including distribution fees....... 1.67%(c)
Expenses, excluding distribution fees....... .92%(c)
Net investment income....................... 5.06%(c)
Portfolio turnover rate....................... 17%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C Shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-181
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, North Carolina Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, North
Carolina Series, as of August 31, 1995, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, North Carolina Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-182
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--95.5%
- ------------------------------------------------------------------------------------------------------------------------------
Akron, Bath & Copley Twnshps., Hosp. Dist. Rev., Summa
Health, Systems Proj., Ser. A A 5.75% 11/15/08 $ 3,465 $ 3,488,527
Akron, Gen. Oblig. A 10.50 12/01/04 200 281,188
Akron, Gen. Oblig., F.S.A. Aaa 4.50 12/01/12 645 544,309
Allen Cnty. Wtr. & Swr. Dist., A.M.B.A.C. Aaa 7.80 12/01/08 1,000(d)(f) 1,128,600
Bellefontaine City Sch. Dist.,
A.M.B.A.C. Aaa Zero 12/01/06 495 279,358
A.M.B.A.C. Aaa Zero 12/01/07 485 256,143
A.M.B.A.C. Aaa Zero 12/01/08 485 239,396
A.M.B.A.C. Aaa Zero 12/01/09 390 179,252
A.M.B.A.C. Aaa Zero 12/01/10 390 166,491
A.M.B.A.C. Aaa Zero 12/01/11 465 186,256
Berea City Sch. Dist., A.M.B.A.C. Aaa 5.00 12/15/17 4,375 3,939,863
Canton, Water Works Sys., Gen. Oblig. Aaa 5.85 12/01/15 700 706,020
Carroll Cnty. Econ. Dev. Rev., Great Trail Lake Ctr.,
F.H.A. NR 11.75 8/01/14 680 781,211
Cleveland City Sch. Dist., Gen. Oblig.,
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/05 490 301,879
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/06 400 231,556
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/07 315 170,752
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 12/01/08 550 271,480
Columbus Citation Hsg. Dev. Corp., Mtge. Rev., F.H.A. AA(b) 7.625 1/01/22 1,885 (d) 2,324,375
Columbus, Gen. Oblig., Mun. Arpt. No. 32 Aaa 7.15 7/15/06 435 476,495
Cuyahoga Cnty. Hosp. Rev., Meridia Health Sys. A1 6.25 8/15/24 1,500 1,503,690
Dayton, Gen. Oblig., M.B.I.A Aaa 7.00 12/01/07 480 559,406
Dublin City Sch. Dist., Franklin, Delaware & Union Co.,
A.M.B.A.C. Aaa Zero 12/01/05 1,000 600,970
East Cleveland Rev., Local Gov't. Fund Notes NR 7.90 12/01/97 860 924,672
Franklin Cnty. Hosp. Rev.,
Doctors Hosp. Rev. A 5.875 12/01/13 1,550 1,462,921
Doctors Hosp. Rev. A 5.875 12/01/23 3,000 2,762,100
Holy Cross Hlth. Sys., Ser. B, A.M.B.A.C. Aaa 7.65 6/01/10 2,500 (d) 2,877,125
Franklin Cnty. Pub. Impvt., Ser. 93 Aaa 5.375 12/01/20 1,690 1,590,949
Gahanna Jefferson City Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 445 204,531
Greene Cnty. Swr. Sys. Rev., A.M.B.A.C. Aaa Zero 12/01/08 450 222,120
Guam Pwr. Auth. Rev., Ser. A BBB(b) 6.75 10/01/24 3,110 3,175,434
Hamilton Cnty. Gas Sys. Rev., Ser. A, M.B.I.A. Aaa 4.75 10/15/23 3,250 2,749,565
Hilliard Ohio Sch. Dist.,
Cap. Apprec. Impvt., Ser. A Aaa Zero 12/01/09 2,855 1,312,215
Cap. Apprec. Impvt., Ser. A Aaa Zero 12/01/10 2,855 1,218,800
Kings Cnty. Local Sch. Dist., F.G.I.C. Aaa 5.50 12/01/21 5,230 5,019,231
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-183
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Logan Hocking Local Sch. Dist., Hocking, Perry & Vinton
Co.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 $ 650 $ 298,753
Lucas Cnty. Hosp. Rev.,
Toledo Hosp., Impvt. & Ref., M.B.I.A. Aaa 5.00% 11/15/13 2,000 1,796,460
Toledo Hosp., Impvt. & Ref., M.B.I.A. Aaa 5.00 11/15/22 4,250 3,713,820
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/05 1,000 608,480
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/07 500 267,525
Mount Vernon City Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 585,845
Newark Ltd. Tax Gen. Oblig., Wtr. Impvt., A.M.B.A.C. Aaa Zero 12/01/06 805 454,310
Ohio Mun. Elec. Generation Agcy., A.M.B.A.C. Aaa 5.375 2/15/24 2,000 1,850,780
Ohio St. Air Quality Dev. Auth. Rev., Poll. Ctrl.,
Edison Proj., Ser. A, F.G.I.C Aaa 7.45 3/01/16 3,750 4,137,787
Cleveland Co., Proj., F.G.I.C. Aaa 8.00 12/01/13 2,500 2,953,200
Ohio St. Bldg. Auth.,
Columbus St. Bldg. Proj., Ser. A A 7.75 10/01/07 750 (d) 841,492
Das Data Ctr. Proj. Aaa 6.00 10/01/08 615 657,620
St. Correctional Facs. A 5.90 10/01/07 2,450 2,593,276
St. Correctional Facs., Ser. A Aaa 8.00 8/01/06 600 (d) 664,014
St. Correctional Facs., Ser. A Aaa 8.00 8/01/08 500 (d) 553,345
Workers Comp. - W. Green Bldg. A A 4.75 4/01/14 2,740 2,359,304
Ohio St. Higher Edl. Fac. Comn. Rev. Aa 7.70 10/01/18 965 (d) 1,044,892
Ohio St. Higher Edl. Fac. Comn. Rev.,
Case Western Resv. Univ., Ser. A Aa 7.70 10/01/18 35 37,898
Case Western Resv. Univ., Ser. B Aa 6.50 10/01/20 750 818,895
Oberlin Coll. NR 7.375 10/01/14 1,000 (d) 1,127,770
Ohio St. Mtge. Rev., Ser. A, F.H.A. AAA(b) 8.15 8/01/17 3,500 3,817,345
Ohio St. Poll. Ctrl. Rev., Standard Oil Co. AA-(b) 6.75 12/01/15 1,350 1,547,181
Ohio St. Wtr. Dev. Auth. Rev., Ser. I Aaa 7.50 12/01/08 1,200 (d) 1,326,108
Ottawa Cnty. San. Sew. Sys. Rev., Danbury Proj.,
A.M.B.A.C. Aaa 7.375 10/01/14 1,000 (d) 1,131,190
Oxford Hosp. Facs. Rev., 1st Mtge., McCullough Hyde Mem. NR 8.00 5/01/17 1,445 1,490,532
Pickerington Local Sch. Dist.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/08 890 439,304
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 935 429,745
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/13 525 185,246
Puerto Rico Comnwlth., Aqueduct & Swr. Auth. Rev., Ser. A Baa 7.875 7/01/17 1,000 1,113,750
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev. Baa1 5.50 7/01/15 5,000 4,700,800
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev., Ser. W Baa1 5.25 7/01/20 1,005 897,535
Puerto Rico Comnwlth., Reg. Linked Bonds, M.B.I.A. Aaa 5.782 7/01/08 2,000 (e) 2,068,460
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O Baa1 5.00 7/01/12 1,720 1,539,142
Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth.
Facs., Ser. J Baa1 Zero 7/01/06 3,000 1,668,390
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-184
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Portfolio of Investments as of August 31, 1995 OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Rural Lorain Cnty. Wtr. Auth. Res. Rev., A.M.B.A.C. Aaa 7.70% 10/01/08 $ 2,000 (d) $ 2,241,100
Scioto Cnty. Hosp. Fac. Rev., Portsmouth Proj., Ser. B,
M.B.I.A. Aaa 7.625 5/15/08 2,290 2,528,687
Sugarcreek Local Sch. Dist., F.G.I.C. Aaa Zero 12/01/08 500 243,010
Summit Cnty. Ind. Dev. Rev., Century Products, Gerber
Foods A2 7.75 11/01/05 3,250 3,445,163
Trumbull Cnty.,
Cap. Apprec. Aaa Zero 12/01/08 1,250 617,000
Cap. Apprec. Aaa Zero 12/01/09 1,250 574,525
Tuscarawas Cnty. Hosp. Fac. Rev., Union Hosp. Proj., Ser.
A Baa 6.50 10/01/21 200 186,716
Univ. of Puerto Rico Revs., Ref. Ser. M, M.B.I.A. Aaa 5.25 6/01/25 1,545 1,412,856
Univ. of Puerto Rico Revs., Cap. Apprec. Ref. Ser. N,
M.B.I.A., Aaa Zero 6/01/13 4,245 1,557,236
Univ. of Toledo, Gen. Receipts, M.B.I.A. Aaa 7.70 6/01/18 1,000 (d) 1,110,240
Virgin Islands Pub. Fin. Auth. Rev., Ser. A NR 7.25 10/01/18 1,000 1,054,960
Virgin Islands Terr., Hugo Ins. Claims Fund Prog., Ser. 91 NR 7.75 10/01/06 440 479,459
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 1,000 1,063,240
Woodmore Indpt. Sch. Dist., Gen. Oblig.,
A.M.B.A.C. Aaa Zero 12/01/05 490 294,475
A.M.B.A.C. Aaa Zero 12/01/06 480 270,893
------------
Total long-term investments (cost $102,265,313) 108,936,634
------------
SHORT-TERM INVESTMENTS--3.3%
Cuyahoga Cnty., Univ. Hosp. of Cleveland, Ser. 85,
F.R.D.D.
(cost $3,800,000) VMIG1 3.55 9/01/95 3,800 3,800,000
------------
Total Investments--98.8%
(cost $106,065,313; Note 4) 112,736,634
Other assets in excess of liabilities--1.2% 1,326,563
------------
Net Assets--100% $114,063,197
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (c).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
<TABLE>
<C> <S>
(b) Standard & Poor's rating.
(c) For purposes of amortized cost valuation, the maturity date of such securities is considered to be the later of the next
date on which the security can be redeemed at par or the next date on which the rate of interest is adjusted.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year
end.
(f) Pledged as initial margin on financial futures contracts.
</TABLE>
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-185
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $106,065,313).................................................................... $112,736,634
Interest receivable.......................................................................................... 1,729,925
Receivable for Series shares sold............................................................................ 4,846
Deferred expenses and other assets........................................................................... 3,072
------------
Total assets.............................................................................................. 114,474,477
------------
Liabilities
Payable for Series shares reacquired......................................................................... 139,123
Accrued expenses and other liabilities....................................................................... 102,276
Dividends payable............................................................................................ 58,627
Management fee payable....................................................................................... 43,272
Due to broker-variation margin............................................................................... 35,406
Distribution fee payable..................................................................................... 30,976
Deferred trustee's fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 411,280
------------
Net Assets................................................................................................... $114,063,197
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 95,644
Paid-in capital in excess of par.......................................................................... 107,058,560
------------
107,154,204
Accumulated net realized gain on investments.............................................................. 329,547
Net unrealized appreciation on investments................................................................ 6,579,446
------------
Net assets, August 31, 1995............................................................................... $114,063,197
------------
------------
Class A:
Net asset value and redemption price per share
($51,132,450 / 4,289,011 shares of beneficial interest issued and outstanding)......................... $11.92
Maximum sales charge (3.0% of offering price)............................................................. .37
Maximum offering price to public.......................................................................... $12.29
Class B:
Net asset value, offering price and redemption price per share
($62,804,534 / 5,264,771 shares of beneficial interest issued and outstanding)......................... $11.93
Class C:
Net asset value, offering price and redemption price per share
($126,213 / 10,580 shares of beneficial interest issued and outstanding)............................... $11.93
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-186
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
-----------------
<S> <C>
Income
Interest................................... $ 7,429,419
---------------
Expenses
Management fee, net of waiver of $38,218... 538,657
Distribution fee--Class A.................. 29,904
Distribution fee--Class B.................. 427,051
Distribution fee--Class C.................. 458
Custodian's fees and expenses.............. 89,000
Transfer agent's fees and expenses......... 76,000
Reports to shareholders.................... 75,000
Registration fees.......................... 40,000
Audit fee.................................. 11,000
Legal fee.................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 819
---------------
Total expenses.......................... 1,301,089
Less: custodian fee credit................. (8,848)
---------------
Net expenses............................ 1,292,241
---------------
Net investment income......................... 6,137,178
---------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,393,375
Financial futures transactions............. (586,229)
---------------
807,146
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments................................ 917,581
Financial futures contracts................ (49,375)
---------------
868,206
---------------
Net gain on investments....................... 1,675,352
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 7,812,530
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
----- ------
<S> <C> <C>
Operations
Net investment income.......... $ 6,137,178 $ 6,388,587
Net realized gain on investment
transactions................ 807,146 800,646
Net change in unrealized
appreciation (depreciation)
of investments.............. 868,206 (7,741,847)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 7,812,530 (552,614)
------------ ------------
Dividends to shareholders from net
investment income (Note 1)
Class A........................ (1,643,462) (258,026)
Class B........................ (4,490,813) (6,130,561)
Class C........................ (2,903) --
------------ ------------
(6,137,178) (6,388,587)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 6,780,605 16,655,835
Net asset value of shares
issued in reinvestment of
dividends................... 3,526,725 3,713,106
Cost of shares reacquired...... (20,943,985) (16,986,967)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (10,636,655) 3,381,974
------------ ------------
Total decrease.................... (8,961,303) (3,559,227)
Net Assets
Beginning of year................. 123,024,500 126,583,727
------------ ------------
End of year....................... $114,063,197 $123,024,500
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-187
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Ohio Series (the ``Series'') commenced
investment operations in September, 1984. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in ``investment grade'' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement PMF has responsibility for all investment
advisory services and supervises the subadviser's
- --------------------------------------------------------------------------------
B-188
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
performance of such services. PMF has entered into a subadvisory agreement with
The Prudential Investment Corporation (``PIC''); PIC furnishes investment
advisory services in connection with the management of the Fund. PMF pays for
the cost of the subadviser's services, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $38,218
($0.004 per share; 0.03% of average daily net assets). The Series is not
required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $14,300 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $165,700 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995 the Series incurred fees of approximately $53,000 for the services of
PMFS. As of August 31, 1995, approximately $4,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $42,529,053 and
$57,876,505, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1995
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation of investments for federal income tax purposes was
$6,671,321 (gross unrealized appreciation--$7,261,271; gross unrealized
depreciation--$589,950).
The Series utilized its capital loss carryforward of approximately $279,400 to
offset the Series net taxable gains realized and recognized in the fiscal year
ended August 31, 1995.
At August 31, 1995 the Series sold 17 financial futures contracts on the
Municipal Bond Index and sold 48 financial futures contracts on U.S. Treasury
Bonds both of which expire in September 1995. The value at sale of such
contracts was $7,285,063. The value of such contracts on August 31, 1995 was
$7,376,938, thereby resulting in an unrealized loss of $91,875.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
automatically convert to Class A shares on a
- --------------------------------------------------------------------------------
B-189
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualified to purchase Class A
shares at net asset value.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended August
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 66,566 $ 777,944
Shares issued in reinvestment of
dividends......................... 76,044 896,433
Shares reacquired................... (429,023) (5,024,610)
---------- ------------
Net increase in shares outstanding
before conversion................. (286,413) (3,350,233)
Shares issued upon conversion from
Class B........................... 4,170,236 48,050,779
---------- ------------
Net decrease in shares
outstanding....................... 3,883,823 $ 44,700,546
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 163,929 $ 1,993,081
Shares issued in reinvestment of
dividends......................... 12,343 148,632
Shares reacquired................... (146,584) (1,788,120)
---------- ------------
Net increase in shares
outstanding....................... 29,688 $ 353,593
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 508,275 $ 5,874,263
Shares issued in reinvestment of
dividends......................... 228,476 2,627,480
Shares reacquired................... (1,391,757) (15,906,486)
---------- ------------
Net decrease in shares outstanding
before conversion................. (655,006) (7,404,743)
Shares reacquired upon conversion
into Class A...................... (4,166,740) (48,050,779)
---------- ------------
Net decrease in shares
outstanding....................... (4,821,746) $(55,455,522)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 1,210,935 $ 14,657,554
Shares issued in reinvestment of
dividends......................... 295,981 3,564,474
Shares reacquired................... (1,270,756) (15,198,847)
---------- ------------
Net increase in shares
outstanding....................... 236,160 $ 3,023,181
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 11,057 $ 128,398
Shares issued in reinvestment of
dividends......................... 237 2,812
Shares reacquired................... (1,160) (12,889)
---------- ------------
Net increase in shares
outstanding....................... 10,134 $ 118,321
---------- ------------
---------- ------------
August 1, 1994(a) through
August 31, 1994:
Shares sold......................... 446 $ 5,203
---------- ------------
---------- ------------
- ---------------
(a) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
B-190
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
---------------------------------------------------
Year Ended August 31,
---------------------------------------------------
1995 1994 1993 1992 1991
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 11.72 $12.38 $11.69 $11.17 $10.71
------- ------ ------ ------ ------
Income from investment operations
Net investment income......................... .65(a) .66 .69 .70 .70
Net realized and unrealized gain (loss) on
investment transactions..................... .20 (.66) .69 .52 .46
------- ------ ------ ------ ------
Total from investment operations............ .85 -- 1.38 1.22 1.16
------- ------ ------ ------ ------
Less dividends
Dividends from net investment income.......... (.65) (.66) (.69) (.70) (.70)
------- ------ ------ ------ ------
Net asset value, end of year.................. $ 11.92 $11.72 $12.38 $11.69 $11.17
------- ------ ------ ------ ------
------- ------ ------ ------ ------
TOTAL RETURN(b):.............................. 7.59% (0.01)% 12.12% 11.26% 11.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $51,132 $4,749 $4,647 $2,095 $ 923
Average net assets (000)...................... $29,904 $4,733 $2,904 $1,289 $ 615
Ratios to average net assets:
Expenses, including distribution fees...... .83%(a) .84% .84% .81% .93%
Expenses, excluding distribution fees...... .73%(a) .74% .74% .71% .83%
Net investment income...................... 5.50%(a) 5.45% 5.73% 6.34% 6.34%
Portfolio turnover rate....................... 38% 20% 28% 37% 37%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each year reported and includes reinvestment of dividends.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-191
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ----------
----------------------------------------------------------- Year
Year Ended August 31, Ended
----------------------------------------------------------- August 31,
1995 1994 1993 1992 1991 1995
------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 11.73
------- -------- -------- -------- -------- ----------
Income from investment operations
Net investment income......................... .60(a) .61 .65 .65 .65 .57(a)
Net realized and unrealized gain (loss) on
investment transactions..................... .20 (.65) .68 .52 .47 .20
------- -------- -------- -------- -------- ----------
Total from investment operations............ .80 (.04) 1.33 1.17 1.12 .77
------- -------- -------- -------- -------- ----------
Less dividends
Dividends from net investment income.......... (.60) (.61) (.65) (.65) (.65) (.57)
------- -------- -------- -------- -------- ----------
Net asset value, end of period................ $ 11.93 $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 11.93
------- -------- -------- -------- -------- ----------
------- -------- -------- -------- -------- ----------
TOTAL RETURN(b):.............................. 7.16% (0.33)% 11.58% 10.79% 10.74% 6.89%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $62,805 $118,270 $121,937 $102,199 $ 92,572 $ 126
Average net assets (000)...................... $85,410 $121,365 $110,053 $ 96,178 $ 90,437 $ 61
Ratios to average net assets:
Expenses, including distribution fees...... 1.22%(a) 1.24% 1.24% 1.21% 1.33% 1.49%(a)
Expenses, excluding distribution fees...... .72%(a) .74% .74% .71% .83% .74%(a)
Net investment income...................... 5.27%(a) 5.05% 5.33% 5.73% 5.94% 4.76%(a)
Portfolio turnover rate....................... 38% 20% 28% 37% 37% 38%
<CAPTION>
August 1,
Through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $11.75
-----
Income from investment operations
Net investment income......................... .05
Net realized and unrealized gain (loss) on
investment transactions..................... (.02)
-----
Total from investment operations............ .03
-----
Less dividends
Dividends from net investment income.......... (.05)
-----
Net asset value, end of period................ $11.73
-----
-----
TOTAL RETURN(b):.............................. 0.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $5
Average net assets (000)...................... $2
Ratios to average net assets:
Expenses, including distribution fees...... 2.28%(c)
Expenses, excluding distribution fees...... 1.53%(c)
Net investment income...................... 4.73%(c)
Portfolio turnover rate....................... 20%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes reinvestment of dividends. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-192
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report OHIO SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Ohio Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Ohio Series,
as of August 31, 1995, the related statements of operations for the year then
ended and of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Ohio Series, as of August 31, 1995, the results of its operations,
the changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-193
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--99.2%
- ------------------------------------------------------------------------------------------------------------------------------
Allegheny Cnty. Arpt. Rev.,
Greater Pittsburgh Int'l. Arpt., Ser. A, F.S.A. Aaa 6.60% 1/01/04 $ 1,000 $ 1,089,080
Greater Pittsburgh Int'l. Arpt., F.S.A. Aaa 5.625 1/01/23 1,230 1,154,171
Allegheny Cnty. Higher Ed. Bldg. Auth. Rev.,
Robert Morris Coll., M.B.I.A. Aaa 7.00 6/15/08 1,000 1,089,450
Allegheny Cnty. Hosp. Dev. Auth. Rev.,
Allegheny Gen. Hosp., Ser. S, M.B.I.A. Aaa 6.25 9/01/20 1,750 1,779,540
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/14 2,000 647,220
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/16 2,000 568,020
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/18 2,000 499,620
Magee Womens Hosp., F.G.I.C. Aaa Zero 10/01/19 4,000 935,440
Presbyterian Univ. Hosp., Ser. C, M.B.I.A. Aaa 7.625 7/01/15 1,100 1,219,108
West Penn. Hosp. Hlth. Ctr. NR 8.50 1/01/20 2,000 2,211,780
Allegheny Cnty. Ind. Dev. Auth. Rev., USX Proj., Ser. A Baa3 6.70 12/01/20 4,500 4,554,315
Allegheny Cnty. Residential Fin. Auth., Mtge. Rev.,
G.N.M.A.,
Ser. F Aaa 9.00 6/01/17 375 407,831
Ser. Q Aaa 7.40 12/01/22 970 1,032,051
Allegheny Cnty. San. Auth. Swr. Rev., F.G.I.C., Aaa Zero 12/01/05 2,620 1,544,909
Ser. A Aaa Zero 6/01/06 1,640 930,667
Allegheny Cnty., Ser. C-37, M.B.I.A. Aaa 7.30 12/01/10 1,500(c) 1,696,530
Allentown Wtr. Impvt., A.M.B.A.C. Aaa 5.65 7/15/10 1,430 1,445,687
Beaver Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Ohio Edison Proj., Ser. A, F.G.I.C. Aaa 7.75 9/01/24 1,150 1,291,600
Berks Cnty. Ind. Dev. Auth. Rev., Lutheran Home Proj. NR 6.875 1/01/23 1,500 1,459,305
Berks Cnty. Mun. Auth. Hosp. Rev.,
Reading Hosp. Med. Ctr. Proj. M.B.I.A. Aaa 5.70 10/01/14 1,250 1,228,538
Bethlehem Auth. Wtr. Rev., M.B.I.A. Aaa 5.20 11/15/21 3,000 2,728,710
Boyertown Area Sch. Dist., Ser. B, A.M.B.A.C. Aaa 5.25 2/01/17 2,000 1,856,700
Bucks Cnty. Wtr. & Swr. Auth. Rev.,
Neshaminy Interceptor Swr. Sys., F.G.I.C. Aaa Zero 12/01/15 2,175 651,804
Butler Cnty. Hosp. Auth. Rev., North Hills, Passavant
Hosp.,
Ser. A, C.G.I.C. AAA(b) 7.00 6/01/22 1,000 1,088,130
Chester Cnty., Gen. Oblig., Ser. B Aa 5.625 11/15/16 2,090 2,020,946
Chester Upland Sch. Auth., Sch. Rev. A(b) 6.375 9/01/21 1,000 1,017,180
Dauphin Cnty. Gen. Auth. Rev., B.I.G Aaa 7.40 1/01/06 1,000 1,060,570
Delaware Cnty., Gen. Oblig. Aa 5.50 10/01/15 3,000 2,866,470
Delaware Cnty. Auth. Rev.,
Crozer Chester Med. Ctr., Ser. A,B,C; M.B.I.A. Aaa 7.15 12/15/05 2,550 2,908,836
Villanova Univ., M.B.I.A. Aaa 5.50 8/01/23 3,000 2,840,460
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-194
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Recovery Proj.,
Ser. A A1 8.10% 12/01/13 $ 2,000 $ 2,099,700
Delaware River Jt. Toll Bridge Comm. Rev., F.G.I.C. Aaa 6.00 7/01/18 5,500 5,526,950
Doylestown Hosp. Auth. Rev., Pine Run Retirement, Ser. A NR 7.20 7/01/23 3,180 3,141,904
Emmaus Gen. Auth. Rev., Local Gov't. Bond, B.I.G.
Ser. B Aaa 8.00 5/15/18 1,000(e) 1,108,450
Ser. C Aaa 7.90 5/15/18 1,250 1,381,100
Ser. E Aaa 7.90 5/15/18 2,000 2,209,760
Ser. F Aaa 7.90 5/15/18 1,600 1,767,808
Erie Higher Ed. Bldg. Auth., College Rev.,
Mercyhurst Coll. Proj. BBB(b) 7.85 9/15/19 1,000(c) 1,130,700
Mercyhurst Coll. Proj., Ser. B BBB(b) 5.75 3/15/23 3,250 2,798,932
Harrisburg Auth. Lease Rev., Green Cnty. Prison Proj.,
F.G.I.C. Aaa 6.625 6/01/13 1,500 1,645,800
Harrisburg Redev. Auth. Rev., Cap. Impvt., Ser. A,
F.G.I.C. Aaa 7.875 11/02/16 900 970,200
Lancaster Cnty. Solid Waste Mgmt. Auth. Rev.,
Res. Rec. Sys. Landfill Rev. A1 7.875 12/15/09 500 514,595
Res. Rec. Sys. Landfill Rev. A1 7.75 12/15/04 750 775,800
Res. Rec. Sys. Rev. A1 8.375 12/15/04 1,000 1,061,060
Langhorne Manor Boro. Higher Ed. & Hlth. Auth Rev.,
Lower Bucks Hosp. Ba1 7.35 7/01/22 3,275 3,120,322
Latrobe Ind. Dev. Auth. Coll. Rev.,
St. Vincent Coll. Proj. Baa1 6.75 5/01/14 1,800 1,838,178
St. Vincent Coll. Proj. Baa1 6.75 5/01/24 1,500 1,520,280
Lehigh Cnty. Gen. Purpose Auth. Revs.,
Horizon Hlth. Sys. Inc., Ser. A NR 8.25 7/01/13 500 550,575
St. Lukes Hosp. of Bethlehem Proj., A.M.B.A.C. Aaa 5.30 11/15/06 750 761,978
St. Lukes Hosp. of Bethlehem Proj., A.M.B.A.C. Aaa 5.30 11/15/07 1,000 1,004,380
Lower Pottsgrove Township Auth. Swr. Rev.,
Montgomery Cnty., A.M.B.A.C.,
Ser. A Aaa Zero 11/01/13 1,155 397,389
Ser. A Aaa Zero 11/01/15 1,185 356,887
Luzerne Cnty. Ind. Dev. Auth. Exmpt. Facs. Rev., Gas &
Water,
Ser. B Baa3 7.125 12/01/22 6,000 6,139,560
Montgomery Cnty. Higher Ed. & Hlth. Auth. Hosp. Rev.,
Jeanes Hlth. Sys. Proj. BBB(b) 8.625 7/01/07 4,000(c) 4,764,000
Montgomery Cnty. Ind. Dev. Auth. Rev., Poll. Ctrl.,
Philadelphia Elec. Co., Ser. A Baa1 7.60 4/01/21 1,000 1,080,830
Res. Recovery AA-(b) 7.50 1/01/12 2,000 2,147,420
Montgomery Cnty. Redev. Auth., Multi-family Hsg., Ser. A NR 6.50 7/01/25 2,000 1,913,680
Northampton Cnty. Higher Ed. Auth. Rev.,
Lehigh Univ., M.B.I.A. Aaa 7.10 11/15/09 1,500 1,658,025
Moravian Coll. BBB-(b) 8.20 6/01/11 2,095 2,493,699
Moravian Coll., A.M.B.A.C. Aaa 6.25 7/01/11 2,195 2,350,472
Northeastern Hosp. & Ed. Auth. Coll. Rev., Kings Coll.
Proj., Ser. B BBB(b) 6.00 7/15/18 3,235 3,084,087
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-195
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Northumberland Cnty. Ind. Dev. Auth. Rev., Roaring Creek
Wtr. NR 6.375% 10/15/23 $ 1,000 $ 929,270
Pennsylvania Econ. Dev. Auth.,
Macmillan Ltd. Partnership Proj. Baa2 7.60 12/01/20 3,000 3,240,990
Wastewater Treatment Rev., Sun Co. R & M Proj., Ser. A Baa1 7.60 12/01/24 4,500 4,899,015
Pennsylvania Hsg. Fin. Agcy.,
Sngl. Fam. Mtge. Aa 7.80 10/01/20 2,930 3,122,940
Sngl. Fam. Mtge. Aa 7.604 4/01/25 1,050(d) 977,813
Sngl. Fam. Mtge., Ser. X Aa 8.10 10/01/10 780 830,583
Sngl. Fam. Mtge., Ser. X Aa 8.15 4/01/24 420 432,474
Pennsylvania Intergovernmental Cooperation Auth.,
Spec.Tax Rev., M.B.I.A. Aaa 5.60 6/15/15 4,000 3,856,040
Pennsylvania St. Cert. of Part., F.S.A. Aaa 6.25 11/01/06 1,900 2,039,954
Pennsylvania St. Higher Edl. Facs. Auth. Rev.,
Allegheny Coll. BBB+(b) 6.00 11/01/22 2,000 1,863,380
Hahnemann Univ. Proj., M.B.I.A. Aaa 7.20 7/01/09 1,500 1,652,880
La Salle Univ., M.B.I.A. Aaa 7.70 5/01/10 1,100 1,215,456
Med. Coll. of Penn., Ser. A Baa 8.375 3/01/11 355 384,458
Med. Coll. of Penn., Ser. A Baa 7.50 3/01/14 2,350 2,403,956
St. Sys, Ser. J, A.M.B.A.C. Aaa 5.625 6/15/19 1,520 1,459,245
Thomas Jefferson Univ. AAA(b) 8.00 1/01/18 1,250(c) 1,379,750
Pennsylvania St. Ind. Dev. Auth., Econ. Rev., A.M.B.A.C. Aaa 5.50 1/01/14 4,250 4,065,295
Pennsylvania St. Tpke. Comn. Rev.,
Ser. D, F.G.I.C. Aaa 7.625 12/01/17 1,375(c) 1,544,579
Ser. K Aaa 7.50 12/01/19 4,650(c) 5,301,418
Philadelphia Arpt. Rev., Philadelphia Arpt. Sys. Baa 9.00 6/15/15 2,000 2,068,200
Philadelphia Gas Wks. Rev.,
Ser. 13 Baa1 7.70 6/15/11 215 251,337
Ser. 13 Baa1 7.20 6/15/98 500 532,670
Ser. 13 Baa1 7.30 6/15/99 625 676,231
Ser. 13 Aaa 7.70 6/15/21 3,430(c) 4,025,037
Philadelphia Hosps. & Higher Ed. Fac. Auth. Rev.,
Childrens' Hosp. Proj., Ser. A Aa 5.00 2/15/21 2,000 1,715,100
Childrens' Seashore House, Ser. A A-(b) 7.00 8/15/12 1,000 1,052,200
Childrens' Seashore House, Ser. A A-(b) 7.00 8/15/17 1,000 1,052,200
Grad. Hlth. Systems Baa1 7.25 7/01/18 2,750 2,854,802
Grad. Hlth. Systems, Ser. A Baa1 6.25 7/01/18 1,000 922,460
Philadelphia Ind. Dev. Rev.,
Inst. for Cancer Research Proj., Ser. B AA-(b) 7.25 7/01/10 5,770 6,230,504
Nat'l. Brd. of Med. Examiners Proj. A+(b) 6.75 5/01/12 5,000 5,253,450
Philadelphia Mun. Auth. Rev., F.G.I.C. Aaa 5.625 11/15/14 2,000 1,937,080
Philadelphia Mun. Auth. Rev., F.G.I.C. Aaa 5.625 11/15/18 1,500 1,440,750
Philadelphia Pkg. Auth. Rev., Arpt. Pkg., A.M.B.A.C. Aaa 7.375 9/01/18 2,200 2,435,092
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-196
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Philadelphia Redev. Auth. Rev.,
Home Impvt. Loan, Ser. A A 7.40% 6/01/08 $ 350 $ 376,162
Home Impvt. Loan, Ser. A A 7.375 6/01/03 355 371,167
Philadelphia Sch. Dist., Gen. Oblig., Ser. A, M.B.I.A. Aaa 5.85 7/01/09 1,710 1,765,729
Philadelphia Wtr. & Swr. Rev., M.B.I.A. Aaa 6.25 8/01/08 2,000 2,175,960
Philadelphia Wtr. & Swr. Rev., M.B.I.A. Aaa 5.25 6/15/23 2,775 2,519,228
Philadelphia Wtr. & Swr. Rev., M.B.I.A.,
Ser. 15 Aaa Zero 10/01/02 7,900 5,616,347
Ser. 15 Aaa 6.875 10/01/06 700 764,498
Pittsburgh Stadium Auth. Rev., F.G.I.C. Aaa 7.50 10/15/01 500 529,915
Pittsburgh Urban Redev. Auth., Mtge. Rev., Ser. B A1 8.30 4/01/17 795 858,179
Pittsburgh Wtr. & Swr., Ser. A. F.G.I.C. Aaa 5.60 9/01/22 3,000 2,886,990
Pottsgrove Sch. Dist., Gen. Oblig., Ser. A, A.M.B.A.C. Aaa 5.30 10/15/14 2,000 1,885,220
Pottstown Boro. Auth., Swr. Rev., F.G.I.C. Aaa Zero 11/01/03 1,200 802,992
Puerto Rico Comnwlth.,
Gen. Oblig., M.B.I.A. Aaa 5.40 7/01/07 1,500 1,548,930
Gen. Oblig., M.B.I.A. Aaa 5.50 7/01/08 3,340 3,442,171
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 4,030 4,677,419
Gen. Oblig., M.B.I.A. Aaa 7.00 7/01/10 720 835,668
Gen. Oblig., F.S.A. Aaa 7.682 7/01/20 4,250(d) 4,159,688
Gen. Oblig. AAA(b) 7.70 7/01/20 5,250(c) 6,087,742
Puerto Rico Elec. Pwr. Auth., Pwr. Rev., Ser. S Baa1 7.00 7/01/06 1,800 2,030,526
Puerto Rico Hsg. Bank & Fin. Agcy. Baa 5.125 12/01/05 750 720,173
Puerto Rico Hsg. Bank & Fin. Agcy. Baa 5.25 12/01/06 2,000 1,914,600
Sayre Hlth. Care Facs. Auth. Rev., A.M.B.A.C.,
Cap. Asset Fin. Prog. C Aaa 7.70 12/01/13 500 565,695
Cap. Asset Fin. Prog. C Aaa 7.625 12/01/15 1,000 1,127,700
Scranton Pkg. Auth. Rev. A+(b) 8.125 9/15/14 1,600 1,777,840
Scranton-Lackawanna Hlth. & Welfare Auth. Rev.,
Univ. Of Scranton Proj., Ser. C A-(b) 7.50 6/15/06 1,000(c) 1,141,670
Univ. Of Scranton Proj., Ser. C A-(b) 6.50 3/01/15 2,250 2,288,138
So. Fork Mun. Auth. Hosp. Rev., Lee Hosp. Proj., Ser. A A-(b) 5.50 7/01/23 2,500 2,143,000
Swarthmore Boro. Gen. Auth. Rev., Pennsylvania Coll. Rev. A-(b) 7.25 9/15/10 600(c) 676,980
Unity Township Mun. Auth., Gtd. Swr. Rev., A.M.B.A.C.,
Capital Appreciation Aaa Zero 11/01/11 1,035 405,554
Capital Appreciation Aaa Zero 11/01/12 1,035 380,166
Capital Appreciation Aaa Zero 11/01/13 1,035 356,102
Venango Cnty. Gen. Oblig., Ser. B, F.G.I.C. Aaa 5.25 7/15/18 2,265 2,097,345
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund BBB(b) 7.70 10/01/04 1,000 1,095,820
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 1,950 2,057,172
Virgin Islands Terr., Hugo Ins. Claims Fund Prog., Ser. 91 NR 7.75 10/01/06 1,055 1,149,612
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-197
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1995 PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Washington Cnty. Auth. Lease Rev., Mun. Fac., Shadyside
Hosp., Ser. C-1D, A.M.B.A.C. Aaa 7.45% 12/15/18 $ 2,900(c) $ 3,338,944
Washington Cnty. Hosp. Auth. Rev., Monongahela Valley
Hosp. A 6.75 12/01/08 2,750 2,810,225
York Cnty. Solid Waste & Refuse Auth. Ind. Dev. Rev., Res.
Rec. Proj., Ser. C AA-(b) 8.20 12/01/14 1,000 1,103,990
------------
Total long-term investments (cost $237,031,397) 251,671,055
SHORT-TERM INVESTMENT--0.4%
Schuylkill Cnty. Ind. Dev. Auth., Westwood Energy Pty.,
Ser. 85, F.R.D.D. (cost $900,000) P1 3.60 9/01/95 900 900,000
------------
Total Investments--99.6%
(cost $237,931,397; Note 4) 252,571,055
Other assets in excess of liabilities--0.4% 1,094,434
------------
Net Assets--100% $253,665,489
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
C.G.I.C.--Capital Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (f).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at the period end.
(e) Pledged as initial margin on financial futures contracts.
(f) For purposes of amortized cost valuation, the maturity date of these
securities are considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-198
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $237,931,397).................................................................... $252,571,055
Cash......................................................................................................... 72,184
Interest receivable.......................................................................................... 3,846,415
Receivable for investments sold.............................................................................. 1,346,313
Receivable for Series shares sold............................................................................ 66,608
Deferred expenses and other assets........................................................................... 10,420
------------
Total assets.............................................................................................. 257,912,995
------------
Liabilities
Payable for investments purchased............................................................................ 3,480,977
Payable for Series shares reacquired......................................................................... 371,999
Dividends payable............................................................................................ 134,934
Management fee payable....................................................................................... 95,759
Distribution fee payable..................................................................................... 89,757
Accrued expenses............................................................................................. 62,324
Due to broker-variation margin............................................................................... 10,156
Deferred trustees' fees...................................................................................... 1,600
------------
Total liabilities......................................................................................... 4,247,506
------------
Net Assets................................................................................................... $253,665,489
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 240,517
Paid-in capital in excess of par.......................................................................... 240,634,533
------------
240,875,050
Accumulated net realized loss on investments.............................................................. (1,792,188)
Net unrealized appreciation on investments................................................................ 14,582,627
------------
Net assets, August 31, 1995.................................................................................. $253,665,489
------------
------------
Class A:
Net asset value and redemption price per share
($50,696,456 / 4,806,652 shares of beneficial interest issued and outstanding)......................... $10.55
Maximum sales charge (3.0% of offering price)............................................................. .33
Maximum offering price to public.......................................................................... $10.88
Class B:
Net asset value, offering price and redemption price per share
($202,633,238 / 19,213,229 shares of beneficial interest issued and outstanding)....................... $10.55
Class C:
Net asset value, offering price and redemption price per share
($335,795 / 31,838 shares of beneficial interest issued and outstanding)............................... $10.55
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-199
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES PENNSYLVANIA SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................... $16,725,737
---------------
Expenses
Management fee, net of waiver of $84,187... 1,182,799
Distribution fee--Class A.................. 30,092
Distribution fee--Class B.................. 1,115,411
Distribution fee--Class C.................. 1,672
Transfer agent's fees and expenses......... 187,000
Reports to shareholders.................... 156,000
Custodian's fees and expenses.............. 109,000
Registration fees.......................... 36,000
Audit fee.................................. 11,000
Legal fees................................. 10,000
Trustees' fees............................. 3,200
Miscellaneous.............................. 30,887
---------------
Total expenses.......................... 2,873,061
Less custodian fee credit.................. (17,396)
---------------
Net expenses............................ 2,855,665
---------------
Net investment income......................... 13,870,072
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 504,596
Financial futures contracts................ (1,012,601)
---------------
(508,005)
---------------
Net change in unrealized appreciation on:
Investments................................ 2,796,532
Financial futures contracts................ 82,281
---------------
2,878,813
---------------
Net gain on investments....................... 2,370,808
---------------
Net Increase in Net Assets
Resulting from Operations..................... $16,240,880
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income.......... $ 13,870,072 $ 14,193,314
Net realized loss on investment
transactions................ (508,005) (7,799)
Net change in unrealized
appreciation/depreciation of
investments................. 2,878,813 (17,783,224)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. 16,240,880 (3,597,709)
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A..................... (1,734,468) (569,122)
Class B..................... (12,124,140) (13,624,192)
Class C..................... (11,464) --
------------ ------------
(13,870,072) (14,193,314)
------------ ------------
Distributions to shareholders
from net realized gain on
investment transactions
Class A..................... -- (97,328)
Class B..................... -- (2,598,620)
------------ ------------
-- (2,695,948)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 19,260,042 46,954,314
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 7,902,987 9,903,212
Cost of shares reacquired...... (44,342,507) (40,990,785)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (17,179,478) 15,866,741
------------ ------------
Total decrease.................... (14,808,670) (4,620,230)
Net Assets
Beginning of year................. 268,474,159 273,094,389
------------ ------------
End of year....................... $253,665,489 $268,474,159
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-200
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
seventeen series. The monies of each series are invested in separate,
independently managed portfolios. The Pennsylvania Series (the ``Series'')
commenced investment operations in April, 1987. The Series is diversified and
seeks to achieve it's investment objective of obtaining the maximum amount of
income exempt from federal and applicable state income taxes with the minimum of
risk by investing in ``investment grade'' tax-exempt securities whose ratings
are within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures. The Series invests in financial futures
contracts in order to hedge its existing portfolio securities or securities the
Series intends to purchase against fluctuations in value caused by changes in
prevailing interest rates. Should interest rates move unexpectedly, the Series
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts, interest
rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Reclassification of Capital Accounts: The Series accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies.
During the fiscal year the Series decreased paid-in capital and decreased
accumulated net realized losses by $15,560 compared to amounts previously
reported through August 31, 1994. Current year net investment income, net
realized gains and net assets were not affected by this change.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income
- --------------------------------------------------------------------------------
B-201
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
tax regulations which may differ from generally accepted accounting principles.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $84,187
($0.004 per share for Class A, B and C shares: .03% of average net assets). The
Series is not required to reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $32,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $427,000 and $600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $129,000 for the services of
PMFS. As of August 31, 1995, approximately $11,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations includes
certain out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1995 were $47,151,056 and
$59,872,361, respectively.
The cost basis of investments for federal income tax purposes was $237,963,978
and, accordingly, as of August 31, 1995 net unrealized appreciation of
investments for federal income tax purposes is $14,607,077 (gross unrealized
appreciation--$16,370,301; gross unrealized depreciation--$1,763,224).
At August 31, 1995 the Series sold 25 financial futures contracts on the
Municipal Bond Index expiring September 1995. The value at disposition of such
contracts was $2,803,906. The value of such contracts on August 31, 1995 was
$2,860,937 thereby resulting in an unrealized loss of $57,031.
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1995 of approximately $1,452,000 which expires in 2003.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
- --------------------------------------------------------------------------------
B-202
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
The Series will elect to treat net capital losses of approximately $231,500
incurred in the ten month period ended August 31, 1995 as being incurred in the
next fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series offers both Class A, Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 3%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Transactions in shares of beneficial
interest for the fiscal years ended August 31, 1995 and August 31, 1994 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 299,314 $ 3,060,202
Shares issued in reinvestment of
dividends........................ 94,611 981,883
Shares reacquired.................. (429,242) (4,432,346)
---------- ------------
Net decrease in shares outstanding
before conversion................ (35,317) (390,261)
Shares issued upon conversion from
Class B.......................... 3,820,038 39,180,753
---------- ------------
Net increase in shares
outstanding...................... 3,784,721 $ 38,790,492
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 319,034 $ 3,481,332
Shares issued in reinvestment of
dividends and distributions...... 36,716 396,391
Shares reacquired.................. (167,304) (1,791,755)
---------- ------------
Net increase in shares
outstanding...................... 188,446 $ 2,085,968
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995
Shares sold........................ 1,556,154 $ 15,906,587
Shares issued in reinvestment of
dividends........................ 676,394 6,911,570
Shares reacquired.................. (3,929,313) (39,845,757)
---------- ------------
Net decrease in shares outstanding
before conversion................ (1,696,765) (17,027,600)
Shares reacquired upon conversion
into Class A..................... (3,820,038) (39,180,753)
---------- ------------
Net decrease in shares
outstanding...................... (5,516,803) $(56,208,353)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold........................ 3,979,725 $ 43,382,782
Shares issued in reinvestment of
dividends and distributions...... 879,774 9,506,821
Shares reacquired.................. (3,665,816) (39,199,030)
---------- ------------
Net increase in shares
outstanding...................... 1,193,683 $ 13,690,573
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 28,444 $ 293,253
Shares issued in reinvestment of
dividends........................ 926 9,534
Shares reacquired.................. (6,201) (64,404)
---------- ------------
Net increase in shares
outstanding...................... 23,169 $ 238,383
---------- ------------
---------- ------------
August 1, 1994(a) through
August 31, 1994:
Shares sold........................ 8,669 $ 90,200
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-203
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended August 31,
----------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------ ------ ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 10.42 $ 11.21 $10.55 $ 9.96 $ 9.60
------- ------- ------ ------ ------
Income from investment operations
Net investment income......................... .60(a) .59 .62 .62 .62(a)
Net realized and unrealized gain (loss) on
investment transactions.................... .13 (.68) .70 .59 .39
------- ------- ------ ------ ------
Total from investment operations........... .73 (.09) 1.32 1.21 1.01
------- ------- ------ ------ ------
Less distributions
Dividends from net investment income.......... (.60) (.59) (.62) (.62) (.62)
Distributions from net realized gains......... -- (.11) (.04) -- (.03)
------- ------- ------ ------ ------
Total distributions........................ (.60) (.70) (.66) (.62) (.65)
------- ------- ------ ------ ------
Net asset value, end of year.................. $ 10.55 $ 10.42 $11.21 $10.55 $ 9.96
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):.............................. 7.35% (.82)% 12.86% 12.44% 10.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $50,696 $10,651 $9,342 $5,908 $3,521
Average net assets (000)...................... $30,092 $10,315 $7,354 $4,439 $2,366
Ratios to average net assets:
Expenses, including distribution fees...... .80%(a) .75% .78% .81% .83%(a)
Expenses, excluding distribution fees...... .70%(a) .65% .68% .71% .74%(a)
Net investment income...................... 5.76%(a) 5.52% 5.69% 5.99% 6.32%(a)
Portfolio turnover rate....................... 19% 22% 13% 25% 62%
</TABLE>
- ---------------
(a) Net of expense subsidy/management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment dividends
and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-204
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ----------
------------------------------------------------------------ Year
Year Ended August 31, Ended
------------------------------------------------------------ August 31,
1995 1994 1993 1992 1991 1995
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- ----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60 $10.42
-------- -------- -------- -------- -------- ------
Income from investment operations
Net investment income......................... .56(a) .55 .57 .58 .58(a) .53(a)
Net realized and unrealized gain (loss) on
investment transactions.................... .13 (.68) .71 .58 .39 .13
-------- -------- -------- -------- -------- ------
Total from investment operations........... .69 (.13) 1.28 1.16 .97 .66
-------- -------- -------- -------- -------- ------
Less distributions
Dividends from net investment income.......... (.56) (.55) (.57) (.58) (.58) (.53)
Distributions from net realized gains......... -- (.11) (.04) -- (.03) --
-------- -------- -------- -------- -------- -----
Total distributions........................ (.56) (.66) (.61) (.58) (.61) (.53)
-------- -------- -------- -------- -------- ------
Net asset value, end of period................ $ 10.55 $ 10.42 $ 11.21 $ 10.54 $ 9.96 $10.55
-------- -------- -------- -------- -------- ------
-------- -------- -------- -------- -------- ------
TOTAL RETURN(b):.............................. 6.92% (1.22)% 12.54% 11.92% 10.39% 6.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $202,633 $257,732 $263,752 $206,028 $170,162 $ 336
Average net assets (000)...................... $223,082 $266,594 $229,955 $186,113 $146,591 $ 223
Ratios to average net assets:
Expenses, including distribution fees...... 1.17%(a) 1.15% 1.18% 1.21% 1.23%(a) 1.44%(a)
Expenses, excluding distribution fees...... .67%(a) .65% .68% .71% .74%(a) .69%(a)
Net investment income...................... 5.44%(a) 5.11% 5.29% 5.59% 5.94%(a) 5.14%(a)
Portfolio turnover rate....................... 19% 22% 13% 25% 62% 19%
<CAPTION>
August 1,
Through
August 31,
1994
<S> <C>
----------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $10.44
-----
Income from investment operations
Net investment income......................... .04
Net realized and unrealized gain (loss) on
investment transactions.................... (.02)
-----
Total from investment operations........... .02
-----
Less distributions
Dividends from net investment income.......... (.04)
Distributions from net realized gains......... --
-----
Total distributions........................ (.04)
-----
Net asset value, end of period................ $10.42
-----
-----
TOTAL RETURN(b):.............................. .14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 90
Average net assets (000)...................... $ 1
Ratios to average net assets:
Expenses, including distribution fees...... 2.00%(c)
Expenses, excluding distribution fees...... 1.25%(c)
Net investment income...................... 8.51%(c)
Portfolio turnover rate....................... 22%
</TABLE>
- ---------------
(a) Net of expense subsidy/management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each year reported and includes reinvestment dividends
and distributions. Total returns for periods of less than a full year are
not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-205
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential Municipal Series Fund, Pennsylvania Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Municipal Series Fund, Pennsylvania
Series, as of August 31, 1995, the related statements of operations for the year
then ended and of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Pennsylvania Series, as of August 31, 1995, the results of its
operations, the changes in its net assets, and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-206
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a stratgegy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart show the long-term performance of various asset classes and the
rate of inflation.
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in each Prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
(1)
LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)
LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)
LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
(5)
SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of a long-term U.S. Treasury Bond from 1926-1994. Yield represents that of
an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectuses constituting Part A
of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at August 31, 1995.
Statement of Assets and Liabilities at August 31, 1995.
Statement of Operations for the year ended August 31, 1995.
Statement of Changes in Net Assets for the years ended
August 31, 1995 and 1994.
Notes to Financial Statements.
Financial Highlights.
Independent Auditors' Reports.
(B) EXHIBITS:
1. (a) Amended and Restated Declaration of Trust of the Registrant,
incorporated by reference to Exhibit No. 1(a) to Post-Effective
Amendment No. 30 to the Registration Statement on Form N-1A filed
via EDGAR on December 28, 1994 (File No. 2-91216).
(b) Amended and Restated Certificate of Designation, incorporated
by reference to Exhibit No. 1(b) to Post-Effective Amendment No.
30 to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
2. Restated By-Laws, incorporated by reference to Exhibit No. 2 to
Post-Effective Amendment No. 27 to the Registration Statement on
Form N-1A filed via EDGAR on May 12, 1994 (File No. 2-91216).
4. (a) Specimen receipt for shares of beneficial interest, $.01 par
value, of the Registrant (for Class B shares), incorporated by
reference to Exhibit No. 4 to Post-Effective Amendment No. 9 to
the Registration Statement on Form N-1A filed October 31, 1988
(File No. 2-91216).
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of the Registrant (for Class A shares), incorporated by
reference to Exhibit No. 4(b) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A filed August 24, 1990
(File No. 2-91216).
(c) Specimen receipts for shares of beneficial interest of Florida
Series and New Jersey Money Market Series, incorporated by
reference to Exhibit No. 4(c) to Post-Effective Amendment No. 16
to the Registration Statement on Form N-1A filed December 3, 1990
(File No. 2-91216).
(d) Specimen receipts for shares of beneficial interest of
Connecticut Money Market Series and Massachusetts Money Market
Series, incorporated by reference to Exhibit No. 4(d) to
Post-Effective Amendment No. 19 to the Registration Statement on
Form N-1A filed May 10, 1991 (File No. 2-91216).
(e) Specimen receipt for shares of beneficial interest of New York
Income Series, incorporated by reference to Exhibit No. 4(e) to
Post-Effective Amendment No. 24 to the Registration Statement on
Form N-1A filed March 8, 1993 (File No. 2-91216).
(f) Specimen receipt for shares of beneficial interest of Florida
Series (for Class D Shares), incorporated by reference to Exhibit
No. 4(f) to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed April 30, 1993 (File No. 2-91216).
C-1
<PAGE>
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc., incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A filed November 2, 1989 (File No. 2-91216).
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation,
incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A filed
November 2, 1989 (File No. 2-91216).
6. (a) Distribution Agreement with respect to Class D shares, between
the Registrant and Prudential Securities Incorporated,
incorporated by reference to Exhibit No. 6(i) to Post-Effective
Amendment No. 26 to the Registration Statement on Form N-1A filed
via EDGAR on November 1, 1993 (File No. 2-91216).
(b) Amended and Restated Distribution Agreement between the
Registrant (Connecticut Money Market Series, Massachusetts Money
Market Series, New Jersey Money Market Series, New York Money
Market Series) and Prudential Mutual Fund Distributors, Inc.,
incorporated by reference to Exhibit No. 6(l) to Post-Effective
Amendment No. 26 to the Registration Statement on Form N-1A filed
via EDGAR on November 1, 1993 (File No. 2-91216).
(c) Distribution Agreement for Class A shares, incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 30
to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
(d) Distribution Agreement for Class B shares, incorporated by
reference to Exhibit No. 6(d) to Post-Effective Amendment No. 30
to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
(e) Distribution Agreement for Class C shares, incorporated by
reference to Exhibit No. 6(e) to Post-Effective Amendment No. 30
to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
8. (a) Custodian Agreement between the Registrant and State Street
Bank and Trust Company, incorporated by reference to Exhibit No. 8
to Post-Effective Amendment No. 10 to the Registration Statement
on Form N-1A filed November 2, 1989 (File No. 2-91216).
(b) Custodian Agreement between the Registrant and State Street
Bank and Trust Company, incorporated by reference to Exhibit No.
8(b) to Post-Effective Amendment No. 13 to the Registration
Statement on Form N-1A filed August 24, 1990 (File No. 2-91216).
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc., incorporated by reference
to Exhibit No. 9 to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed November 2, 1989 (File
No. 2-91216).
10. Opinion of Counsel.*
11. Consent of Independent Accountants.*
13. Purchase Agreement, incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-1A filed August 29, 1984 (File No. 2-91216).
15. (a) Distribution and Service Plan between the Registrant (Class D
shares) and Prudential Securities Incorporated, incorporated by
reference to Exhibit No. 15(g) to Post-Effective Amendment No. 26
to the Registration Statement on Form N-1A filed via EDGAR on
November 1, 1993 (File No. 2-91216).
(b) Distribution and Service Plan between the Registrant
(Connecticut Money Market Series, Massachusetts Money Market
Series, New Jersey Money Market Series, New York Money Market
Series) and Prudential Mutual Fund Distributors, Inc.,
incorporated by reference to Exhibit No. 15(j) to Post-Effective
Amendment No. 26 to the Registration Statement on Form N-1A filed
via EDGAR on November 1, 1993 (File No. 2-91216).
(c) Distribution and Service Plan for Class A shares, incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No.
30 to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
C-2
<PAGE>
(d) Distribution and Service Plan for Class B shares, incorporated
by reference to Exhibit No. 15(d) to Post-Effective Amendment No.
30 to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
(e) Distribution and Service Plan for Class C shares, incorporated
by reference to Exhibit No. 15(e) to Post-Effective Amendment No.
30 to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216).
16. (a) Schedule of Computation of Performance Information,
incorporated by reference to Exhibit No.16 to Post-Effective
Amendment No. 10 to the Registration Statement on Form N-1A filed
November 2, 1989 (File No. 2-91216).
(b) Schedule of Computation of Performance Information of Class A
shares, incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A filed December 3, 1990 (File No. 2-91216).
17. Financial Data Schedules.*
- --------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 13, 1995, each series of the Fund had the following number of
record holders of shares of beneficial interest, $.01 par value per share:
Connecticut Money Market Series, 1,783 record holders; Florida Series, 2,755
record holders of Class A shares, 242 record holders of Class B shares and 231
record holders of Class C shares; Hawaii Income Series, 49 record holders of
Class A shares, 256 record holders of Class B shares and 40 record holders of
Class C shares; Maryland Series, 831 record holders of Class A shares, 1,040
record holders of Class B shares and 6 record holders of Class C shares;
Massachusetts Series, 873 record holders of Class A shares, 1,146 record holders
of Class B shares and 4 record holders of Class C shares; Massachusetts Money
Market Series, 1,226 record holders; Michigan Series, 1,202 record holders of
Class A shares, 1,917 record holders of Class B shares and 5 record holders of
Class C shares; New Jersey Series, 1,870 record holders of Class A shares, 7,734
record holders of Class B shares and 39 record holders of Class C shares; New
Jersey Money Market Series, 5,433 record holders; New York Money Market Series,
8,240 record holders; New York Series, 5,673 record holders of Class A shares,
6,704 record holders of Class B shares and 22 record holders of Class C shares;
North Carolina Series, 875 record holders of Class A shares, 1,355 record
holders of Class B shares and 7 record holders of Class C shares; Ohio Series,
1,921 record holders of Class A shares, 2,666 record holders of Class B shares
and 7 record holders of Class C shares; and Pennsylvania Series, 2,377 record
holders of Class A shares, 9,209 record holders of Class B shares and 25 record
holders of Class C shares. As of October 13, 1995, the New York Income Series
did not have any record holders of shares of beneficial interest.
ITEM 27. INDEMNIFICATION.
Article V, Section 5.1 of the Registrant's Declaration of Trust provides
that neither shareholders nor Trustees, officers, employees or agents shall be
subject to personal liability to any other person, except (with respect to
Trustees, officers, employees or agents) liability arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of his of her
duties. Section 5.1 also provides that the Registrant will indemnify and hold
harmless each shareholder against all claims and all expenses reasonably related
thereto.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, Trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
Trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 9 or 10 of
each Distribution Agreement (Exhibit 6) to the Registration Statement), each
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
C-3
<PAGE>
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
Trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17(h) and 17(i) of such Act
remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed--Manager" in the Prospectuses constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed on March 30, 1995).
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice President, Executive Vice President and Director of Marketing, PMF; Senior
Director of Marketing Vice President, Prudential Securities Incorporated (Prudential
and Director Securities); Chairman and Director, Prudential Mutual Fund
Distributors, Inc. (PMFD)
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President, Prudential
Securities; Vice President, PMFD
Frank W. Giordano Executive Vice President, Executive Vice President, General Counsel, Secretary and
General Counsel, Director, PMF and PMFD; Senior Vice President, Prudential
Secretary and Director Securities; Director, Prudential Mutual Fund Services, Inc.
(PMFS)
Robert F. Gunia Executive Vice President, Executive Vice President, Chief Financial and Administrative
Chief Financial and Officer, Treasurer and Director, PMF; Senior Vice President,
Administrative Officer, Prudential Securities; Executive Vice President, Chief Financial
Treasurer and Director Officer, Treasurer and Director, PMFD; Director, PMFS
Theresa A. Hamacher Director Director, PMF; Vice President, The Prudential Insurance Company
of America (Prudential); Vice President, The Prudential
Investment Corporation (PIC)
Timothy J. O'Brien Director President, Chief Executive Officer, Chief Operating Officer and
Director, PMFD; Chief Executive Officer and Director, PMFS;
Director, PMF
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF; Executive
Executive Officer and Vice President, Director and Member of Operating Committee,
Director Prudential Securities; Director, Prudential Securities Group,
Inc. (PSG); Executive Vice President, PIC; Director, PMFD;
Director, PMFS
S. Jane Rose Senior Vice President, Senior Vice President, Senior Counsel and Assistant Secretary,
Senior Counsel and PMF; Senior Vice President and Senior Counsel, Prudential
Assistant Secretary Securities
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
51 JFK Parkway
Short HIlls, NJ 07078
Barry M. Gillman Director Director, PIC
Theresa A. Hamacher Vice President Vice President, Prudential; Vice President, PIC; Director, PMF
Harry E. Knapp, Jr. President, Chairman of President, Chairman of the Board, Chief Executive Officer and
the Board, Chief Director, PIC; Vice President, Prudential
Executive Officer and
Director
William P. Link Senior Vice President Executive Vice President, Prudential; Senior Vice President, PIC
Four Gateway Center
Newark, NJ 07102
Richard A. Redeker Executive Vice President President, Chief Executive Officer and Director, PMF; Executive
One Seaport Plaza Vice President, Director and Member of Operating Committee,
New York, NY 10292 Prudential Securities; Director, PSG; Executive Vice President,
PIC; Director, PMFD; Director, PMFS
Eric A. Simonson Vice President and Vice President and Director, PIC; Executive Vice President,
Director Prudential
Claude J. Zinngrabe, Jr. Executive Vice President Vice President, Prudential; Executive Vice President, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for Prudential Government
Securities Trust (Short-Intermediate Term Series), Prudential Jennison Fund,
Inc. and The Target Portfolio Trust, for Class B shares of Prudential Adjustable
Rate Securities Fund, Inc., and for Class B and Class C shares of The BlackRock
Government Income Trust, Global Utility Fund, Inc, Nicholas-Applegate Fund, Inc.
(Nicholas-Applegate Growth Equity Fund), Prudential Allocation Fund, Prudential
California Municipal Fund (California Income Series and California Series),
Prudential Diversified Bond Fund, Inc., Prudential Equity Fund, Inc., Prudential
Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Global Natural Resources Fund, Inc., Prudential
Government Income Fund, Inc., Prudential Growth Opportunity Fund, Inc.,
Prudential High Yield Fund, Inc., Prudential Intermediate Global Income Fund,
Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund (except
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series and New York Money
C-5
<PAGE>
Market Series), Prudential National Municipals Fund, Inc., Prudential Pacific
Growth Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential U.S.
Government Fund and Prudential Utility Fund, Inc. Prudential Securities is also
a depositor for the following unit investment trusts:
The Corporate Income Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii) Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series), Prudential
Government Securities Trust (Money Market Series and U.S. Treasury Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
MoneyMart Assets Inc., Prudential Municipal Series Fund (Connecticut Money
Market Series, Massachusetts Money Market Series, New Jersey Money Market Series
and New York Money Market Series), Prudential-Bache Special Money Market Fund,
Inc. (d/b/a Prudential Special Money Market Fund), Prudential-Bache Tax-Free
Money Fund, Inc. (d/b/a Prudential Tax-Free Money Fund), and for Class A shares
of The BlackRock Government Income Trust, Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund).
Prudential Adjustable Rate Securities Fund, Inc., Prudential Allocation Fund,
Prudential California Municipal Fund (California Income Series and California
Series), Prudential Diversified Bond Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Global Natural Resources Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund, Inc., Prudential Intermediate Global Income
Fund, Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Florida
Series, Hawaii Income Series, Maryland Series, Massachusetts Series, Michigan
Series, New Jersey Series, North Carolina Series, Ohio Series and Pennsylvania
Series), Prudential National Municipals Fund, Inc., Prudential Pacific Growth
Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential U.S.
Government Fund and Prudential Utility Fund, Inc.
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------------ ----------------------------------------------------------------- -----------------
<S> <C> <C>
Robert Golden....................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Alan D. Hogan....................... Executive Vice President, Chief Administrative Officer and None
Director
George A. Murray.................... Executive Vice President and Director None
Leland B. Paton..................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Vincent T. Pica, II................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Richard A. Redeker.................. Executive Vice President and Director Trustee and
President
Gregory W. Scott.................... Executive Vice President, Chief Financial Officer and Director None
Hardwick Simmons.................... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr.................. Executive Vice President, Secretary, General Counsel and Director None
</TABLE>
C-6
<PAGE>
(ii) Information concerning the officers and directors of Prudential Mutual
Fund Distributors, Inc. is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------------ ----------------------------------------------------------------- -----------------
<S> <C> <C>
Joanne Accurso-Soto................. Vice President None
Dennis Annarumma.................... Vice President, Assistant Treasurer and Assistant Comptroller None
Phyllis J. Berman................... Vice President None
Brendan D. Boyle.................... Chairman and Director None
Stephen P. Fisher................... Vice President None
Frank W. Giordano................... Executive Vice President, General Counsel, Secretary and Director None
Robert F. Gunia..................... Executive Vice President, Chief Financial Officer, Treasurer and
Director Vice President
Timothy J. O'Brien.................. President, Chief Executive Officer, Chief Operating Officer and
Director None
Richard A. Redeker.................. Director President and
Trustee
Andrew J. Varley.................... Vice President None
Anita L. Whelan..................... Vice President and Assistant Secretary None
<FN>
- ------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
</TABLE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171. The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New
York, New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10)
and (11) and 31a-1(f) will be kept at Two Gateway Center, documents required by
Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the
Prospectuses and under the captions "Manager" and "Distributor" in the Statement
of Additional Information, constituting Part A and Part B, respectively, of this
Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of New York, and State of New York, on this 30th day of October, 1995.
PRUDENTIAL MUNICIPAL SERIES FUND
By: /s/ RICHARD A. REDEKER
-------------------------------
Richard A. Redeker, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------------------- --------------------
<C> <S> <C>
/s/ RICHARD A. REDEKER
- ------------------------------------------- President and Trustee October 30, 1995
Richard A. Redeker
/s/ EDWARD D. BEACH
- ------------------------------------------- Trustee October 30, 1995
Edward D. Beach
/s/ EUGENE C. DORSEY
- ------------------------------------------- Trustee October 30, 1995
Eugene C. Dorsey
/s/ DELAYNE D. GOLD
- ------------------------------------------- Trustee October 30, 1995
Delayne D. Gold
/s/ HARRY A. JACOBS, JR.
- ------------------------------------------- Trustee October 30, 1995
Harry A. Jacobs, Jr.
/s/ THOMAS T. MOONEY
- ------------------------------------------- Trustee October 30, 1995
Thomas T. Mooney
/s/ THOMAS H. O'BRIEN
- ------------------------------------------- Trustee October 30, 1995
Thomas H. O'Brien
/s/ NANCY HAYS TEETERS
- ------------------------------------------- Trustee October 30, 1995
Nancy Hays Teeters
/s/ GRACE TORRES
- ------------------------------------------- Treasurer and Principal Financial and October 30, 1995
Grace Torres Accounting Officer
</TABLE>
C-8
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- ------------------------------------------------------- --------
<S> <C> <C>
1(a) Amended and Restated Declaration of Trust of the
Registrant, incorporated by reference to Exhibit No.
1(a) to Post-Effective Amendment No. 30 to the
Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216). --
1(b) Amended and Restated Certificate of Designation,
incorporated by reference to Exhibit No. 1(b) to Post-
Effective Amendment No. 30 to the Registration
Statement on Form N-1A filed via EDGAR on December 28,
1994 (File No. 2-91216). --
2 Restated By-Laws, incorporated by reference to Exhibit
No. 2 to Post-Effective Amendment No. 27 to the
Registration Statement on Form N-1A filed via EDGAR on
May 12, 1994 (File No. 2-91216). --
4(a) Specimen receipt for shares of beneficial interest,
$.01 par value, of the Registrant (for Class B
shares), incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 9 to the Registration
Statement on Form N-1A filed October 31, 1988 (File
No. 2-91216). --
4(b) Specimen receipt for shares of beneficial interest,
$.01 par value, of the Registrant (for Class A
shares), incorporated by reference to Exhibit No. 4(b)
to Post-Effective Amendment No. 13 to the Registration
Statement on Form N-1A filed August 24, 1990 (File No.
2-91216). --
4(c) Specimen receipts for shares of beneficial interest of
Florida Series and New Jersey Money Market Series,
incorporated by reference to Exhibit No. 4(c) to
Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A filed December 3, 1990 (File
No. 2-91216). --
4(d) Specimen receipts for shares of beneficial interest of
Connecticut Money Market Series and Massachusetts
Money Market Series, incorporated by reference to
Exhibit No. 4(d) to Post-Effective Amendment No. 19 to
the Registration Statement on Form N-1A filed May 10,
1991 (File No. 2-91216). --
4(e) Specimen receipt for shares of beneficial interest of
New York Income Series, incorporated by reference to
Exhibit No. 4(e) to Post-Effective Amendment No. 24 to
the Registration Statement on Form N-1A filed March 8,
1993 (File No. 2-91216). --
4(f) Specimen receipt for shares of beneficial interest of
Florida Series (for Class D Shares), incorporated by
reference to Exhibit No. 4(f) to Post-Effective
Amendment No. 25 to the Registration Statement on Form
N-1A filed April 30, 1993 (File No. 2-91216). --
5(a) Management Agreement between the Registrant and
Prudential Mutual Fund Management, Inc., incorporated
by reference to Exhibit No. 5(a) to Post-Effective
Amendment No. 10 to the Registration Statement on Form
N-1A filed November 2, 1989 (File No. 2-91216). --
5(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment
Corporation, incorporated by reference to Exhibit No.
5(b) to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A filed November 2,
1989 (File No. 2-91216). --
6(a) Distribution Agreement with respect to Class D shares,
between the Registrant and Prudential Securities
Incorporated, incorporated by reference to Exhibit No.
6(i) to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A filed via EDGAR on
November 1, 1993 (File No. 2-91216). --
6(b) Amended and Restated Distribution Agreement between the
Registrant (Connecticut Money Market Series,
Massachusetts Money Market Series, New Jersey Money
Market Series, New York Money Market Series) and
Prudential Mutual Fund Distributors, Inc.,
incorporated by reference to Exhibit No. 6(l) to
Post-Effective Amendment No. 26 to the Registration
Statement on Form N-1A filed via EDGAR on November 1,
1993 (File No. 2-91216). --
6(c) Distribution Agreement for Class A shares, incorporated
by reference to Exhibit No. 6(c) to Post-Effective
Amendment No. 30 to the Registration Statement on Form
N-1A filed via EDGAR on December 28, 1994 (File No.
2-91216).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- ------------------------------------------------------- --------
<S> <C> <C>
6(d) Distribution Agreement for Class B shares, incorporated
by reference to Exhibit No. 6(d) to Post-Effective
Amendment No. 30 to the Registration Statement on Form
N-1A filed via EDGAR on December 28, 1994 (File No.
2-91216). --
6(e) Distribution Agreement for Class C shares, incorporated
by reference to Exhibit No. 6(e) to Post-Effective
Amendment No. 30 to the Registration Statement on Form
N-1A filed via EDGAR on December 28, 1994 (File No.
2-91216). --
8(a) Custodian Agreement between the Registrant and State
Street Bank and Trust Company, incorporated by
reference to Exhibit No. 8 to Post-Effective Amendment
No. 10 to the Registration Statement on Form N-1A
filed November 2, 1989 (File No. 2-91216). --
8(b) Custodian Agreement between the Registrant and State
Street Bank and Trust Company, incorporated by
reference to Exhibit No. 8(b) to Post-Effective
Amendment No. 13 to the Registration Statement on Form
N-1A filed August 24, 1990 (File No. 2-91216). --
9 Transfer Agency and Service Agreement between the
Registrant and Prudential Mutual Fund Services, Inc.,
incorporated by reference to Exhibit No. 9 to
Post-Effective Amendment No. 10 to the Registration
Statement on Form N-1A filed November 2, 1989 (File
No. 2-91216). --
10 Opinion of Counsel.*
11 Consent of Independent Accountants.*
13 Purchase Agreement, incorporated by reference to
Exhibit No. 13 to Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A filed August 29,
1984 (File No. 2-91216). --
15(a) Distribution and Service Plan between the Registrant
(Class D shares) and Prudential Securities
Incorporated, incorporated by reference to Exhibit
15(g) to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A filed via EDGAR on
November 1, 1993 (File No. 2-91216). --
15(b) Distribution and Service Plan between the Registrant
(Connecticut Money Market Series, Massachusetts Money
Market Series, New Jersey Money Market Series, New
York Money Market Series) and Prudential Mutual Fund
Distributors, Inc., incorporated by reference to
Exhibit 15(j) to Post-Effective Amendment No. 26 to
the Registration Statement on Form N-1A filed via
EDGAR on November 1, 1993 (File No. 2-91216). --
15(c) Distribution and Service Plan for Class A shares,
incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 30 to the Registration
Statement on Form N-1A filed via EDGAR on December 28,
1994 (File No. 2-91216). --
15(d) Distribution and Service Plan for Class B shares,
incorporated by reference to Exhibit No. 15(d) to
Post-Effective Amendment No. 30 to the Registration
Statement on Form N-1A filed via EDGAR on December 28,
1994 (File No. 2-91216). --
15(e) Distribution and Service Plan for Class C shares,
incorporated by reference to Exhibit No. 15(e) to
Post-Effective Amendment No. 30 to the Registration
Statement on Form N-1A filed via EDGAR on December 28,
1994 (File No. 2-91216). --
16(a) Schedule of Computation of Performance Information,
incorporated by reference to Exhibit No.16 to Post-
Effective Amendment No. 10 to the Registration
Statement on Form N-1A filed November 2, 1989 (File
No. 2-91216). --
16(b) Schedule of Computation of Performance Information of
Class A shares, incorporated by reference to Exhibit
No. 16(b) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed December 3,
1990 (File No. 2-91216). --
17 Financial Data Schedules.*
<FN>
- --------------
*Filed herewith.
</TABLE>
<PAGE>
SULLIVAN & WORCESTER
Boston
October 23, 1995
Trustees of Prudential
Municipal Series Fund
c/o Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, N.Y. 10292
Re: Post-Effective Amendment to
Registration Statement on Form N-1A
-----------------------------------
Ladies and Gentlemen:
You have requested our opinion as to certain matters of Massachusetts law
in connection with the filing by Prudential Municipal Series Fund, a
Massachusetts trust with transferable shares (the "Fund"), pursuant to Section
24(e)(1) of the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder, of Post-Effective Amendment No. 32 to the Fund's
Registration Statement on Form N-1A (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), Registration No.
2-91216, and Post-Effective Amendment No. 33 to the Fund's Registration
Statement under the Investment Company Act of 1940, as amended, Registration No.
811-4023 (collectively, the "Amendment").
We have acted as Massachusetts counsel to the Fund in connection with the
preparation of the Amendment and the authorization by the Trustees of the Fund
of the issuance and sale of the several series of shares of beneficial interest,
$.01 par value, of the Fund (the "Shares") which are to be registered pursuant
to the Amendment. In this connection we have examined and are familiar with the
Amended and Restated Declaration of Trust dated August 17, 1994 of the Fund,
amending and restating the original Declaration of Trust dated May 18, 1984
under which the Fund was established, the Bylaws of the Fund, the Amendment,
substantially in the form in which it is to be filed with the Securities and
Exchange Commission (the "SEC"), the most recent forms of the Prospectus (the
"Prospectus") and the Statement of Additional Information (the "SAI") included
in the Fund's Registration Statement on Form N-1A, the actions of the Trustees
to organize the Fund and to authorize the issuance of the Shares, certificates
of Trustees and officers of the Fund and of public officials as to matters of
fact, and such other documents and instruments, certified or otherwise
identified to our satisfaction, and such questions of law and fact, as we have
considered necessary or appropriate for purposes of the opinions expressed
herein. We have assumed the genuineness of the signatures on, and the
authenticity of, all documents furnished to us, and the conformity to the
originals of documents submitted to us as certified copies, which facts we have
not independently verified.
<PAGE>
Trustees of Prudential
Municipal Series Fund -2- October 23, 1995
Based upon and subject to the foregoing, we hereby advise you that, in our
opinion, under the laws of The Commonwealth of Massachusetts:
1. The Fund has been duly organized and is validly existing as a trust
with transferable shares of the type commonly called a Massachusetts
business trust.
2. The Fund is authorized to issue an unlimited number of Shares; the
Shares to be registered pursuant to the Amendment have been duly and
validly authorized by all requisite action of the Trustees of the
Fund, and no action of the shareholders of the Fund is required in
such connection.
3. The Shares, when duly sold, issued and paid for as contemplated by the
Prospectus and the SAI, will be validly and legally issued, fully paid
and nonassessable by the Fund.
With respect to the opinion stated in paragraph 3 above, we wish to point
out that the sharehol ders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.
This letter expresses our opinions as to the provisions of the Declaration
and the laws of Massachusetts applying to business trusts generally, but does
not extend to the Massachusetts Securities Act, or to federal securities or
other laws.
We hereby consent to the reference to us in the
Prospectus, and to the filing of this letter with the SEC as an exhibit to the
Registration Statement. In giving such consent, we do not thereby concede that
we come within the category of persons whose consent is required under Section 7
of the Securities Act.
Very truly yours,
/s/ SULLIVAN & WORCESTER
SULLIVAN & WORCESTER
A REGISTERED LIMITED LIABILITY PARTNERSHIP
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 32 to Registration
Statement No. 2-91216 of Prudential Municipal Series Fund of our reports dated
October 16, 1995, appearing in the Statement of Additional Information, which is
a part of such Registration Statement, and to the references to us under the
headings "Financial Highlights" in the Prospectuses, which are a part of such
Registration Statement, and "Custodian, Transfer and Dividend Disbursing Agent
and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche LLP
New York, New York
October 26, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - CONNECTICUT MONEY MARK
<SERIES>
<NUMBER> 004
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - CONNECTICUT MONEY M
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 63,470,365
<INVESTMENTS-AT-VALUE> 63,470,365
<RECEIVABLES> 1,548,250
<ASSETS-OTHER> 53,003
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 65,071,618
<PAYABLE-FOR-SECURITIES> 2,100,472
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104,361
<TOTAL-LIABILITIES> 2,204,833
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 62,866,785
<SHARES-COMMON-STOCK> 62,866,785
<SHARES-COMMON-PRIOR> 54,302,173
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 62,866,785
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,111,441
<OTHER-INCOME> 0
<EXPENSES-NET> 298,810
<NET-INVESTMENT-INCOME> 1,812,631
<REALIZED-GAINS-CURRENT> 714
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,813,345
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,813,345)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 234,075,262
<NUMBER-OF-SHARES-REDEEMED> (227,262,566)
<SHARES-REINVESTED> 1,751,916
<NET-CHANGE-IN-ASSETS> 8,564,612
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 285,517
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 51,459
<AVERAGE-NET-ASSETS> 57,103,000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - FLORIDA SERIE
<SERIES>
<NUMBER> 005
<NAME> PRUDENTIAL MUNI SERIES - FLORIDA SERIES (CLAS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 131,134,361
<INVESTMENTS-AT-VALUE> 135,897,997
<RECEIVABLES> 3,447,736
<ASSETS-OTHER> 320,904
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139,666,637
<PAYABLE-FOR-SECURITIES> 1,101,410
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 248,284
<TOTAL-LIABILITIES> 1,349,694
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 138,418,975
<SHARES-COMMON-STOCK> 13,751,002
<SHARES-COMMON-PRIOR> 14,791,625
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,818,793)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,716,761
<NET-ASSETS> 138,316,943
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,710,600
<OTHER-INCOME> 0
<EXPENSES-NET> 397,136
<NET-INVESTMENT-INCOME> 8,313,464
<REALIZED-GAINS-CURRENT> (4,155,474)
<APPREC-INCREASE-CURRENT> 6,025,242
<NET-CHANGE-FROM-OPS> 10,183,232
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,313,464)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26,011,068
<NUMBER-OF-SHARES-REDEEMED> (39,832,414)
<SHARES-REINVESTED> 3,653,143
<NET-CHANGE-IN-ASSETS> (8,298,435)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (663,319)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 696,115
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (475,825)
<AVERAGE-NET-ASSETS> 124,259,000
<PER-SHARE-NAV-BEGIN> 9.91
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.06
<EXPENSE-RATIO> 0.24
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - FLORIDA SERIE
<SERIES>
<NUMBER> 006
<NAME> PRUDENTIAL MUNI SERIES - FLORIDA SERIES (CLAS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 131,134,361
<INVESTMENTS-AT-VALUE> 135,897,997
<RECEIVABLES> 3,447,736
<ASSETS-OTHER> 320,904
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139,666,637
<PAYABLE-FOR-SECURITIES> 1,101,410
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 248,284
<TOTAL-LIABILITIES> 1,349,694
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 138,418,975
<SHARES-COMMON-STOCK> 13,751,002
<SHARES-COMMON-PRIOR> 14,791,625
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,818,793)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,716,761
<NET-ASSETS> 138,316,943
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,710,600
<OTHER-INCOME> 0
<EXPENSES-NET> 397,136
<NET-INVESTMENT-INCOME> 8,313,464
<REALIZED-GAINS-CURRENT> (4,155,474)
<APPREC-INCREASE-CURRENT> 6,025,242
<NET-CHANGE-FROM-OPS> 10,183,232
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,313,464)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26,011,068
<NUMBER-OF-SHARES-REDEEMED> (39,832,414)
<SHARES-REINVESTED> 3,653,143
<NET-CHANGE-IN-ASSETS> (8,298,435)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (663,319)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 696,115
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (475,825)
<AVERAGE-NET-ASSETS> 4,699,000
<PER-SHARE-NAV-BEGIN> 9.91
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.06
<EXPENSE-RATIO> 0.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - FLORIDA SERIE
<SERIES>
<NUMBER> 007
<NAME> PRUDENTIAL MUNI SERIES - FLORIDA SERIES (CLAS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 131,134,361
<INVESTMENTS-AT-VALUE> 135,897,997
<RECEIVABLES> 3,447,736
<ASSETS-OTHER> 320,904
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139,666,637
<PAYABLE-FOR-SECURITIES> 1,101,410
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 248,284
<TOTAL-LIABILITIES> 1,349,694
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 138,418,975
<SHARES-COMMON-STOCK> 13,751,002
<SHARES-COMMON-PRIOR> 14,791,625
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4,818,793)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,716,761
<NET-ASSETS> 138,316,943
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 8,710,600
<OTHER-INCOME> 0
<EXPENSES-NET> 397,136
<NET-INVESTMENT-INCOME> 8,313,464
<REALIZED-GAINS-CURRENT> (4,155,474)
<APPREC-INCREASE-CURRENT> 6,025,242
<NET-CHANGE-FROM-OPS> 10,183,232
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,313,464)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26,011,068
<NUMBER-OF-SHARES-REDEEMED> (39,832,414)
<SHARES-REINVESTED> 3,653,143
<NET-CHANGE-IN-ASSETS> (8,298,435)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (663,319)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 696,115
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (475,825)
<AVERAGE-NET-ASSETS> 10,265,000
<PER-SHARE-NAV-BEGIN> 9.91
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.15
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.06
<EXPENSE-RATIO> 0.92
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - HAWAII INCOME
<SERIES>
<NUMBER> 011
<NAME> PRUDENTIAL MUNI SERIES - HAWAII INCOME SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 13,156,446
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<TOTAL-ASSETS> 14,015,263
<PAYABLE-FOR-SECURITIES> 877,228
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,821
<TOTAL-LIABILITIES> 936,049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,503,130
<SHARES-COMMON-STOCK> 1,078,393
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<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94,967
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 481,117
<NET-ASSETS> 13,079,214
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 524,323
<OTHER-INCOME> 0
<EXPENSES-NET> 67,280
<NET-INVESTMENT-INCOME> 457,043
<REALIZED-GAINS-CURRENT> 94,967
<APPREC-INCREASE-CURRENT> 481,117
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (457,043)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 13,508,423
<NUMBER-OF-SHARES-REDEEMED> (1,205,115)
<SHARES-REINVESTED> 199,822
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<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> (115,461)
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<PER-SHARE-NAV-BEGIN> 11.64
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> 0.49
<PER-SHARE-DIVIDEND> (0.58)
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<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.13
<EXPENSE-RATIO> 0.46
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - HAWAII INCOME
<SERIES>
<NUMBER> 012
<NAME> PRUDENTIAL MUNI SERIES - HAWAII INCOME SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 13,156,446
<INVESTMENTS-AT-VALUE> 13,652,094
<RECEIVABLES> 214,296
<ASSETS-OTHER> 148,873
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<TOTAL-ASSETS> 14,015,263
<PAYABLE-FOR-SECURITIES> 877,228
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,821
<TOTAL-LIABILITIES> 936,049
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<SHARES-COMMON-STOCK> 1,078,393
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94,967
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 481,117
<NET-ASSETS> 13,079,214
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 524,323
<OTHER-INCOME> 0
<EXPENSES-NET> 67,280
<NET-INVESTMENT-INCOME> 457,043
<REALIZED-GAINS-CURRENT> 94,967
<APPREC-INCREASE-CURRENT> 481,117
<NET-CHANGE-FROM-OPS> 1,033,127
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (457,043)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 13,508,423
<NUMBER-OF-SHARES-REDEEMED> (1,205,115)
<SHARES-REINVESTED> 199,822
<NET-CHANGE-IN-ASSETS> 13,079,214
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (115,461)
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<PER-SHARE-NAV-BEGIN> 11.64
<PER-SHARE-NII> 0.54
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<PER-SHARE-DIVIDEND> (0.54)
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<PER-SHARE-NAV-END> 12.13
<EXPENSE-RATIO> 0.86
<AVG-DEBT-OUTSTANDING> 0
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - HAWAII INCOME
<SERIES>
<NUMBER> 013
<NAME> PRUDENTIAL MUNI SERIES - HAWAII INCOME SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 13,156,446
<INVESTMENTS-AT-VALUE> 13,652,094
<RECEIVABLES> 214,296
<ASSETS-OTHER> 148,873
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<TOTAL-ASSETS> 14,015,263
<PAYABLE-FOR-SECURITIES> 877,228
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 58,821
<TOTAL-LIABILITIES> 936,049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,503,130
<SHARES-COMMON-STOCK> 1,078,393
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<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 94,967
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 481,117
<NET-ASSETS> 13,079,214
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 524,323
<OTHER-INCOME> 0
<EXPENSES-NET> 67,280
<NET-INVESTMENT-INCOME> 457,043
<REALIZED-GAINS-CURRENT> 94,967
<APPREC-INCREASE-CURRENT> 481,117
<NET-CHANGE-FROM-OPS> 1,033,127
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (457,043)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 13,508,423
<NUMBER-OF-SHARES-REDEEMED> (1,205,115)
<SHARES-REINVESTED> 199,822
<NET-CHANGE-IN-ASSETS> 13,079,214
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 44,784
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (115,461)
<AVERAGE-NET-ASSETS> 373,000
<PER-SHARE-NAV-BEGIN> 11.64
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.49
<PER-SHARE-DIVIDEND> (0.51)
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<PER-SHARE-NAV-END> 12.13
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MARYLAND SERI
<SERIES>
<NUMBER> 014
<NAME> PRUDENTIAL MUNI SERIES - MARYLAND SERIES (CLA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
<INVESTMENTS-AT-COST> 38,147,405
<INVESTMENTS-AT-VALUE> 39,316,063
<RECEIVABLES> 569,151
<ASSETS-OTHER> 503,570
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,388,784
<PAYABLE-FOR-SECURITIES> 1,081,681
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 115,431
<TOTAL-LIABILITIES> 1,197,112
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,585,944
<SHARES-COMMON-STOCK> 3,675,436
<SHARES-COMMON-PRIOR> 5,061,622
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<ACCUM-APPREC-OR-DEPREC> 1,164,439
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,833,827
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<EXPENSES-NET> 647,931
<NET-INVESTMENT-INCOME> 2,185,896
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<DISTRIBUTIONS-OF-INCOME> (2,185,896)
<DISTRIBUTIONS-OF-GAINS> (440,627)
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<NUMBER-OF-SHARES-SOLD> 2,121,739
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<SHARES-REINVESTED> 1,744,018
<NET-CHANGE-IN-ASSETS> (14,817,954)
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 224,481
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 614,488
<AVERAGE-NET-ASSETS> 11,341,000
<PER-SHARE-NAV-BEGIN> 10.66
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MARYLAND SERI
<SERIES>
<NUMBER> 015
<NAME> PRUDENTIAL MUNI SERIES - MARYLAND SERIES (CLA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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<PAID-IN-CAPITAL-COMMON> 38,585,944
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<EXPENSES-NET> 647,931
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<NET-CHANGE-FROM-OPS> 2,199,126
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<DISTRIBUTIONS-OF-INCOME> (2,185,896)
<DISTRIBUTIONS-OF-GAINS> (440,627)
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<NUMBER-OF-SHARES-SOLD> 2,121,739
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<GROSS-EXPENSE> 614,488
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<PER-SHARE-NAV-BEGIN> 10.67
<PER-SHARE-NII> 0.49
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MARYLAND SERI
<SERIES>
<NUMBER> 016
<NAME> PRUDENTIAL MUNI SERIES - MARYLAND SERIES (CLA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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<NUMBER-OF-SHARES-SOLD> 2,121,739
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<PER-SHARE-NAV-BEGIN> 10.67
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MASSACHUSETTS
<SERIES>
<NUMBER> 017
<NAME> PRUDENTIAL MUNI SER. - MASSACHUSETTS SERIES (
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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<GROSS-EXPENSE> 660,289
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<PER-SHARE-NAV-BEGIN> 11.37
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MASSACHUSETTS
<SERIES>
<NUMBER> 018
<NAME> PRUDENTIAL MUNI SER. - MASSACHUSETTS SERIES (
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
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<ACCUM-APPREC-OR-DEPREC> 3,834,763
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<NUMBER-OF-SHARES-SOLD> 3,105,413
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<NET-CHANGE-IN-ASSETS> (1,807,293)
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<GROSS-EXPENSE> 660,289
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<PER-SHARE-NAV-BEGIN> 11.36
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MASSACHUSETTS
<SERIES>
<NUMBER> 019
<NAME> PRUDENTIAL MUNI SER. - MASSACHUSETTS SERIES (
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MASSACHUSETTS MONEY MA
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<NUMBER> 020
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MASSACHUSETTS MONEY
<S> <C>
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<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MICHIGAN SERI
<SERIES>
<NUMBER> 021
<NAME> PRUDENTIAL MUNI SERIES - MICHIGAN SERIES (CLA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MICHIGAN SERI
<SERIES>
<NUMBER> 022
<NAME> PRUDENTIAL MUNI SERIES - MICHIGAN SERIES (CLA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - MICHIGAN SERI
<SERIES>
<NUMBER> 023
<NAME> PRUDENTIAL MUNI SERIES - MICHIGAN SERIES (CLA
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-END> AUG-31-1995
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW JERSEY SE
<SERIES>
<NUMBER> 027
<NAME> PRUDENTIAL MUNI SERIES - NEW JERSEY (C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW JERSEY SE
<SERIES>
<NUMBER> 028
<NAME> PRUDENTIAL MUNI SERIES - NEW JERSEY SERIES (C
<S> <C>
<PERIOD-TYPE> YEAR
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW JERSEY SE
<SERIES>
<NUMBER> 029
<NAME> PRUDENTIAL MUNI SERIES - NEW JERSEY SERIES (C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1995
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNI SERIES FUND - NEW JERSEY MONEY MARKET SER
<SERIES>
<NUMBER> 030
<NAME> PRUDENTIAL MUNI SERIES FUND - NEW JERSEY MONEY MARKET
<S> <C>
<PERIOD-TYPE> YEAR
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW YORK SERI
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<NAME> PRUDENTIAL MUNI SERIES - NEW YORK SERIES (CLA
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW YORK SERI
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<NAME> PRUDENTIAL MUNI SERIES - NEW YORK SERIES (CLA
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW YORK SERI
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<NAME> PRUDENTIAL MUNI SERIES - NEW YORK SERIES (CLA
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<TABLE> <S> <C>
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW YORK MONEY MARKET
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NEW YORK MONEY MAR
<S> <C>
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NORTH CAROLIN
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<NUMBER> 035
<NAME> PRUDENTIAL MUNI SERIES - NO. CAROLINA SERIES
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<PAGE>
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<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NORTH CAROLIN
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<NAME> PRUDENTIAL MUNI SERIES - NO. CAROLINA SERIES
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<PAGE>
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<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - NORTH CAROLIN
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<NUMBER> 037
<NAME> PRUDENTIAL MUNI SERIES - NO. CAROLINA SERIES
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - OHIO SERIES
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<NUMBER> 038
<NAME> PRUDENTIAL MUNI SERIES FUND - OHIO SERIES (CL
<S> <C>
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - OHIO SERIES
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<NAME> PRUDENTIAL MUNI SERIES FUND - OHIO SERIES (CL
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - OHIO SERIES
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<NAME> PRUDENTIAL MUNI SERIES FUND - OHIO SERIES (CL
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<NAME> PRUDENTIAL MUNICIPAL SERIES FUND - PENNSYLVANIA
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<NAME> PRUDENTIAL MUNI SERIES - PENNSYLVANIA SERIES
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<NAME> PRUDENTIAL MUNI SERIES - PENNSYLVANIA SERIES
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<NAME> PRUDENTIAL MUNI SERIES - PENNSYLVANIA SERIES
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