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PRUDENTIAL MUNICIPAL SERIES FUND
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STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 1, 1996
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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 Gateway Center Three, Newark, New Jersey 07102, 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, 1996, copies of which may be obtained from the Fund upon request.
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117B
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TABLE OF CONTENTS
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CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
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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 19 20 20 15 20
Investment Objectives and
Policies..................... B-1 6 8 8 8 8 6 8
In General.................. B-1 -- -- -- -- -- --
Tax-Exempt Securities....... B-3 6 8 8 8 8 6 8
Risks of Investing in
Defaulted Securities....... B-4 -- -- 8 -- -- -- --
Special Considerations
Regarding Investments in
Tax-Exempt Securities...... B-5 9 12 11 12 12 9 12
Additional Issuers.......... B-14 -- -- -- -- -- -- --
Floating Rate and Variable
Rate Securities............ B-16 7 8 8 8 8 7 8
Put Options................. B-16 8 9 9 10 10 8 10
Financial Futures Contracts
and Options Thereon........ B-17 -- 10 10 11 11 -- 11
When-Issued and Delayed
Delivery Securities........ B-19 8 10 10 10 10 8 10
Portfolio Turnover.......... B-20 -- 12 12 13 13 -- 13
Illiquid Securities......... B-20 10 13 12 13 13 10 13
Repurchase Agreements....... B-21 9 12 12 12 12 9 12
Investment Restrictions....... B-21 10 13 13 13 13 10 13
Trustees and Officers......... B-23 10 13 13 13 13 10 13
Manager....................... B-27 10 13 13 13 13 10 13
Distributor................... B-30 11 14 14 14 14 11 14
Portfolio Transactions and
Brokerage.................... B-35 12 16 15 16 16 12 16
Purchase and Redemption of
Fund Shares.................. B-37 16 21 20 21 21 16 21
Specimen Price Make-Up...... B-37 -- -- -- -- -- -- --
Reduction and Waiver of
Initial Sales
Charges--Class A Shares.... B-37 -- 24 22 23 24 -- 23
Waiver of the Contingent
Deferred Sales
Charge--Class B Shares..... B-39 -- 27 25 26 27 -- 26
Quantity Discount--Class B
Shares Purchased Prior to
August 1, 1994............. B-39 -- -- -- 27 27 -- 27
Shareholder Investment
Account...................... B-40 22 30 28 29 29 22 29
Automatic Reinvestment of
Dividends and/or
Distributions.............. B-40 22 29 27 29 29 22 29
Exchange Privilege.......... B-40 21 28 26 28 28 21 28
Dollar Cost Averaging....... B-41 -- -- -- -- -- -- --
Automatic Savings
Accumulation Plan (ASAP)... B-42 22 30 27 29 29 22 29
Systematic Withdrawal
Plan....................... B-42 23 30 27 29 29 22 29
How to Redeem Shares of the
Money Market Series........ B-43 17 -- -- -- -- 19 --
Mutual Fund Programs........ B-44 -- -- -- -- -- -- --
Net Asset Value............... B-44 13 16 16 16 17 13 16
Performance Information....... B-45 6 17 16 17 17 6 17
Distributions and Tax
Information.................. B-49 13 17 17 17 18 13 17
Distributions............... B-49 15 19 18 19 19 14 19
Federal Taxation............ B-50 13 18 17 17 18 13 17
State Taxation.............. B-53 14 19 18 19 19 14 19
Organization and
Capitalization............... B-59 15 20 19 20 20 15 20
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants...... B-60 12 16 15 16 16 12 16
Description of Tax-Exempt
Security Ratings............. B-61 -- -- A-1 -- -- -- --
Financial Statements.......... B-63 5 5 5 5 5 5 5
Appendix I.................... I-1 -- -- -- -- -- -- --
Appendix II................... II-1 -- -- -- -- -- -- --
Appendix III.................. III-1 -- -- -- -- -- -- --
Appendix IV................... IV-1 -- -- -- -- -- -- --
</TABLE>
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
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CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
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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 20
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
Additional Issuers.................... B-14 -- -- -- -- -- -- -- --
Floating Rate and Variable Rate
Securities........................... B-16 8 7 8 5 7 8 8 8
Put Options........................... B-16 10 8 9 6 8 10 10 10
Financial Futures Contracts and
Options Thereon...................... B-17 11 -- 10 8 -- 11 11 11
When-Issued and Delayed Delivery
Securities........................... B-19 10 8 10 7 8 10 10 10
Portfolio Turnover.................... B-20 13 -- 12 10 -- 12 13 13
Illiquid Securities................... B-20 13 10 12 10 9 13 13 13
Repurchase Agreements................. B-21 12 9 12 9 9 12 12 12
Investment Restrictions................. B-21 13 10 13 10 9 13 13 13
Trustees and Officers................... B-23 13 10 13 10 9 13 13 13
Manager................................. B-27 13 10 13 11 10 13 13 13
Distributor............................. B-30 14 11 14 11 10 14 14 14
Portfolio Transactions and Brokerage.... B-35 16 12 16 13 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-37 -- -- -- -- -- -- -- --
Reduction and Waiver of Initial Sales
Charges--Class A Shares.............. B-37 24 -- 24 18 -- 23 24 23
Waiver of the Contingent Deferred
Sales Charge--Class B Shares......... B-39 27 -- 27 -- -- 26 27 26
Quantity Discount--Class B Shares
Purchased Prior to August 1, 1994.... B-39 27 -- 27 -- -- 27 27 27
Shareholder Investment Account.......... B-40 30 22 30 21 21 29 30 29
Automatic Reinvestment of Dividends
and/or Distributions................. B-40 30 22 30 21 21 29 29 29
Exchange Privilege.................... B-40 28 21 28 20 20 28 28 28
Dollar Cost Averaging................. B-41 -- -- -- -- -- -- -- --
Automatic Savings Accumulation Plan
(ASAP)............................... B-42 30 22 30 21 21 29 29 29
Systematic Withdrawal Plan............ B-42 30 22 30 21 21 29 29 29
How to Redeem Shares of the Money
Market Series........................ B-43 -- 19 -- -- 18 -- -- --
Mutual Fund Programs.................. B-44 -- -- -- -- -- -- -- --
Net Asset Value......................... B-44 17 12 16 13 12 16 17 17
Performance Information................. B-45 17 6 17 13 6 17 17 17
Distributions and Tax Information....... B-49 18 13 17 14 12 17 18 18
Distributions......................... B-49 19 14 19 15 13 19 19 19
Federal Taxation...................... B-50 18 13 17 14 12 17 18 18
State Taxation........................ B-53 19 14 19 15 13 18 19 19
Organization and Capitalization......... B-59 20 15 20 16 14 20 20 20
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants............................ B-60 16 12 16 13 11 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 -- -- -- -- -- -- -- --
Appendix III............................ III-1 -- -- -- -- -- -- -- --
Appendix IV............................. IV-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
Prime-1 for commercial paper, 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 or comparable ratings of another nationally recognized statistical rating
organization (NRSRO). 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 comparable ratings of another NRSRO 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 NRSROs 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 and other NRSROs represent the
B-1
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respective opinions of such firms of the qualities of the securities each
undertakes to rate and such ratings are general and are not absolute standards
of quality. In determining suitability of investment in a particular unrated
security, the investment adviser will take into consideration asset and debt
service coverage, the purpose of the financing, history of the issuer, existence
of other rated securities of the issuer, credit enhancement by virtue of letter
of credit or other financial guaranty deemed suitable by the investment adviser
and other general conditions as may be relevant, including comparability to
other issuers.
Under normal market conditions, each series will attempt to invest
substantially all and, as a matter of fundamental policy, will invest at least
80% of the value of its assets in securities the interest on which is exempt
from state and federal income taxes or the series' assets will be invested so
that at least 80% of the income will be exempt from state and federal income
taxes, except that, as a matter of fundamental policy, during normal market
conditions the Florida Series', the New Jersey Series' and the New Jersey Money
Market Series' assets will be invested so that at least 80% of their total
assets will be invested in Florida Obligations (as defined in the Florida
Series' Prospectus) and New Jersey Obligations (as defined in the New Jersey
Series' and the New Jersey Money Market Series' Prospectuses), respectively, and
except that, as a matter of fundamental policy, during normal market conditions
the Connecticut Money Market Series' and the Massachusetts Money Market Series'
assets will be invested so that at least 80% of their total assets will be
invested in municipal securities which pay income exempt from federal income
taxes. These latter securities primarily will be Connecticut Obligations (as
defined in the Connecticut Money Market Series' Prospectus) and Massachusetts
Obligations (as defined in the Massachusetts Money Market Series' Prospectus),
respectively, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Connecticut Obligations and Massachusetts
Obligations, respectively, that also meet the Series' credit quality and average
weighted maturity requirements, to purchase Connecticut Obligations and
Massachusetts Obligations, respectively. Each series will continuously monitor
the 80% tests to ensure that either the asset investment or the income test is
met at all times, except for temporary defensive measures during abnormal market
conditions.
A series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax, pending the investment or reinvestment in tax-exempt securities of
proceeds of sales of shares or sales of portfolio securities or in order to
avoid the necessity of liquidating portfolio investments to meet redemptions of
shares by investors or where market conditions due to rising interest rates or
other adverse factors warrant temporary investing. Investments (other than those
of the money market series) in taxable securities may include: obligations of
the U.S. Government, its agencies or instrumentalities; other debt securities
rated within the four highest grades by either Moody's or S&P or another NRSRO
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 (Prime-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 NRSROs 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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<PAGE>
Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a series may own so long as, with respect to 75% of the assets
of each series other than the Florida Series, the Hawaii Income Series, the New
York Income Series and the money market series (except for the New York Money
Market Series), it does not invest more than 5% of its total assets in the
securities of such issuer (except obligations issued or guaranteed by the U.S.
Government). As for the other 25% of a series' assets not subject to the
limitation described above, there is no limitation on the amount of these assets
that may be invested in a minimum number of issuers. Because of the relatively
smaller number of issuers of investment-grade tax-exempt securities (or, in the
case of the New York Money Market Series, high quality tax-exempt securities) in
any one of these states, a series is more likely to use this ability to invest
its assets in the securities of a single issuer than is an investment company
which invests in a broad range of tax-exempt securities. Such concentration
involves an increased risk of loss to a series should the issuer be unable to
make interest or principal payments thereon or should the market value of such
securities decline.
The Fund expects that a series will not invest more than 25% of its total
assets in municipal obligations the source of revenue of which is derived from
any one of the following categories: hospitals and health facilities; turnpikes
and toll roads; ports and airports; or colleges and universities. A series may
invest more than 25% of its total assets in municipal obligations of one or more
of the following types: obligations of public housing authorities; general
obligations of states and localities; lease rental obligations of states and
local authorities; obligations of state and local housing finance authorities;
obligations of municipal utilities systems; bonds that are secured or backed by
the Treasury or other U.S. Government guaranteed securities; or industrial
development and pollution control bonds. Each of the foregoing types of
investments might be subject to particular risks which, to the extent that a
series is concentrated in such investments, could affect the value or liquidity
of the series.
Each series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and any premiums on the refunded bonds and a verification
report prepared by a party acceptable to a nationally recognized statistical
rating agency, or counsel to the holders of the refunded bonds, so verifies,
(iv) the escrow agreement provides that the issuer of the refunded bonds grants
and assigns to the escrow agent, for the equal and ratable benefit of the
holders of the refunded bonds, an express first lien on, pledge of and perfected
security interest in the escrowed securities and the interest income thereon,
(v) the escrow agent had no lien of any type with respect to the escrowed
securities for payment of its fees or expenses except to the extent there are
excess securities, as described in (ii) above, and (vi) except with respect to
the Florida Series, the Hawaii Income Series, the New York Income Series and the
money market series, the series will not invest more than 25% of its total
assets in pre-refunded bonds of the same municipal issuer.
TAX-EXEMPT SECURITIES
Tax-exempt securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is exempt from federal income tax (except for possible
application of the alternative minimum tax) and, in certain instances,
applicable state or local income and personal property taxes. Such securities
are traded primarily in the over-the-counter market.
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the
B-3
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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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<PAGE>
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN TAX-EXEMPT SECURITIES
The following is a discussion of the general factors that might influence
the ability of the issuers in the various states to repay principal and interest
when due on the obligations contained in the portfolio of each series. Such
information is derived from sources that are generally available to investors
and is believed to be accurate, but has not been independently verified and may
not be complete.
In August 1996 legislation reforming the welfare system was passed by
Congress. In essence, it eliminated the federal guarantee of welfare benefits
and leaves the determination of eligibility to the states. The federal
government will provide block grants to the states for their use in the funding
of benefits. Although states are not obligated to absorb any of the reductions,
they may choose to do so. The consequences of such generosity may be adverse in
the event of an economic downturn or a swelling in the ranks of beneficiaries.
If a state feels compelled to offset lost benefits, the net effect is merely a
shifting of the burden to the state and may affect its rating over time.
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 through 1995. A portion of such surplus was used to retire some of
the outstanding Economic Recovery Notes issued to fund the cumulative deficit of
fiscal year 1990-1991. As of August 9, 1996, only $236,000 of principal remains
outstanding on the Economic Recovery Notes.
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 1996-97 anticipates General Fund revenues of
$9,158 million and General Fund expenditures of $9,157.8 million, resulting in a
projected surplus of $0.2 million. The State Comptroller's General Fund
financial statements released August 1, 1996, however, estimate an operating
surplus for fiscal year 1996 of $224.8 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 in 1995,
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 rate of 11.25% in 1995 to 7.5% by January 1, 2000
and to phase out corporate level tax on S corporations by the year 2001.
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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, 1995, Florida ranked fourth in the nation, with an estimated
population of 14.1 million. The service sector is Florida's largest employment
sector, currently accounting for 87% 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
1986, the job creation rate for the State is almost twice the nation's rate;
however, in recent years, Florida's unemployment rate has tracked above the
national average. The average rate of unemployment for Florida since 1986 is
6.2%, while the national average is also 6.2%.
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 $15,311.3 million for 1995-1996, an increase of 3.3% over revenues for
1994-1995. Estimated Revenue of $14,538.8 million for fiscal 1995-1996
represents an increase of 6.5% over 1994-1995.
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 previous 5 years 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 is effective
starting with fiscal year 1995-1996. Any excess revenues generated will be
deposited in the Budget Stabilization Fund. 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.
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Over the years, financial operations in the State have been sound, with
consistently favorable budget performance. Surpluses in excess of 5% of revenues
have regularly triggered constitutionally provided tax credits, even during
fiscal years 1992 and 1993 when revenue growth had slowed due to the recession.
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 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. Estimates for 1996 General Fund revenues were revised downward by
$148 million, compared to projections made in the enacted budget; nevertheless,
the State closed fiscal year 1996 with a General Fund balance on a budgetary
basis of $13.1 million and $493.2 million in the Revenue Stabilization Account
of the State Reserve Fund. The enacted 1997 budget holds overall appropriations
to slightly over 1996 levels, reflecting slowed revenue growth and the absence
of an appropriation to the now fully funded Revenue Stabilization Account of the
State Reserve Fund. The State projects ending its fiscal year with a General
Fund balance on a budgetary basis of $22.5 million and $493.2 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.
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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 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. Although job losses
continued in high tech manufacturing and finance during 1992 and 1993, strong
gains were registered in services, construction and high tech non-manufacturing.
The December 1993 unemployment rate was 6.3% compared to 6.4% for the nation. In
August 1996, the unemployment rate was 4.0%, the lowest rate since June 1989 and
below the national rate of 5.1%.
The most recent recession 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. 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. In addition, since 1990,
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. Fiscal year 1995 tax revenue
collections totaled $11.163 billion, which exceeded estimates by $13 million and
exceeded fiscal 1994 tax revenues by $556 million. Through August, fiscal 1996
tax collections were 3.7% greater than in the prior-year period.
Despite successful concerted efforts to control Massachusetts' financial
operations, substantial risks to the Commonwealth's financial stability remain.
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 of 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.
Many communities have responded to the limitations of Proposition 2 1/2 through
statutorily permitted overrides and exclusions. During fiscal years 1992 and
1993, 123 communities had successful votes adding $47.4 million to their levy
limits. Although Proposition 2 1/2 will continue to constrain local property tax
revenues, significant capacity exists for overrides in nearly all cities and
towns.
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 1996 projects modest growth. Real gross domestic product
is projected to grow 2.4% in 1996 on a calendar year basis. Nationally, car and
light truck sales are expected to total 14.6 million units in 1996. The forecast
assumes an inflation rate of 2.4%, accompanied by steady interest rates.
Ninety-day U.S. Treasury rates are expected to average 5.1% for 1996.
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The State's forecast for the Michigan economy reflects the national outlook.
Total wage and salary employment is projected to grow 1.4% in 1996. This slight
growth reflects the ongoing diversification of the Michigan economy. The
unemployment rate is projected to continue to fall from 5.4% in 1995 to 5.2% in
1996, placing Michigan below the national forecasted unemployment rate of 5.7%.
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. General Fund revenue fell by 2.5% to $7,995.2 million in
fiscal year 1995, principally due to the earmarking of $882 million in income
tax revenue to Michigan's School Aid Fund. Fiscal year 1996 General Fund
revenues are expected to be $8,396.7 million, an increase of 5.0% over the
previous year. Fiscal year 1997 revenues are projected at $8,867.4 million, an
increase over fiscal 1995-1996 of 5.6%.
The fiscal year 1997 budget is built upon the assumption that the United
States Congress and the President will develop a comprehensive agreement that
will lead to a balanced budget within seven years. It further assumes that the
Republican balanced budget plan approved by the U.S. Congress and vetoed by the
President in December 1995 will be the basis of this federal balanced budget
plan.
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,
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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 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 State ended fiscal year 1996 with estimated undesignated balances
of $873 million. The 1997 budget accommodates the final stage of the State's
$1.25 billion multi-year personal income tax cut, and includes appropriations
totaling $15.978 billion, down $211 million or 1.3% from fiscal year 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 is 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 non-agricultural
employment growth of 0.9% for calendar 1996 and of 0.6% for calendar 1997.
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
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$241 million. The State Comptroller's audited financial statements for fiscal
year 1996 are expected to indicate that the State's accumulated deficit was not
reduced significantly in fiscal year 1996, despite the State's ending cash
balance of $445 million. The 1996-1997 budget is projected to result in $33.1
billion in General Fund disbursements. The budget also enacted a tax reduction
and economic incentive program which will reduce receipts. These reductions,
together with the reduction in the State personal income tax in 1995 (scheduled
to occur over a three-year period) and business tax reductions enacted in 1994
will result in significant budget gaps by the 1997-1998 fiscal year. The
1996-1997 budget also relies on $1.3 billion in non-recurring receipts or
savings. There is no assurance that the State will not face substantial
potential budget gaps in this or 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 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. By the end of the
1995-1996 fiscal year, the surplus grew to approximately $700 million, but a
portion of that was appropriated.
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.
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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 16% 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.
Pursuant to the general appropriations act for the entire biennium, passed on
July 11, 1991, $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. 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 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 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 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 7, 1996 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, was transferred to the Bond
Stabilization Fund and other funds, including school assistance funds and, in
anticipation of possible federal program changes, a human services stabilization
fund. Fiscal year 1996 proved to be another year of positive results for the
General Revenue Fund with a year-end fund balance of $781 million.
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
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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 or leases relating to such
obligations.
PENNSYLVANIA
Pennsylvania is an established state with a diversified economy.
Pennsylvania has been historically identified as a heavy industry state,
although that reputation has changed over the last thirty years as the coal,
steel and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector, which
includes trade, medical, and health services, education and financial
institutions.
For the five year period fiscal 1991 through fiscal 1995, total revenues and
other sources rose at a 9.1% average annual rate while expenditures and other
uses grew by 7.4% annually. Over two-thirds of the increase in total revenues
and other sources during this period occurred during fiscal 1992 when a $2.7
billion tax increase was enacted to address a fiscal 1991 budget deficit and to
fund increased expenditures for fiscal 1992. For the four year period fiscal
1992 through fiscal 1995, total revenues and other sources increased at an
annual average of 3.3%, less than one-half the rate of increase for the five
year period beginning with fiscal 1991. This slower rate of growth was due, in
part, to tax reductions and other tax law revisions that restrained the growth
of tax receipts for the fiscal years 1993, 1994 and 1995.
Expenditures and other uses followed a pattern similar to that for revenues,
although with smaller growth rates, during the fiscal years 1991 through 1995.
Program areas having the largest increase in costs for the fiscal years 1991
through 1995 were for protection of persons and property, due to an expansion of
state prisons, and for public health and welfare, due to rising caseloads,
program utilization and increased process. Recent efforts to restrain the rapid
expansion of public health and welfare program costs have resulted in
expenditure increases at or below the total rate of increase for total
expenditures in each fiscal year.
The General Fund, the Commonwealth's largest fund, receives all tax
receipts, revenues, federal grants and reimbursements that are not specified by
law to be deposited elsewhere. The General Fund is the principal operating fund
for the majority of the Commonwealth's governmental activities. Debt service on
all obligations, except those issued for highway purposes or for the benefit of
other special revenue funds, is payable from the General Fund.
Fiscal 1995 was the fourth consecutive fiscal year the Commonwealth reported
an increase in the fiscal year-end unappropriated balance. The fiscal 1995
unappropriated surplus (prior to reserves for transfer to the Tax Stabilization
Reserve Fund) was $540 million, an increase of $204.2 million over the fiscal
1994 unappropriated surplus (prior to transfers). Commonwealth revenues were
$459.4 million (2.9%) above 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, totaled $15,674
million, representing an increase of 5% over spending during fiscal 1994.
For GAAP purposes, the General Fund recorded a $49.8 million deficit for
fiscal 1995, leading to a decline in the fund balance to $688.3 million at June
30, 1995. The two items which predominantly contributed to the decline in the
fund balance were (i) the use of a more comprehensive procedure to compute the
liabilities for certain public welfare programs, leading to an increase for the
year-end accruals, and (ii) a change to the methodology to calculate the
year-end accrual for corporate tax payables which increased the tax refund
liability by $72 million for the 1995 fiscal year when compared to the previous
fiscal year.
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The fiscal 1996 unappropriated surplus (prior to transfer to the Tax
Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate.
Net expenditures and encumbrances from Commonwealth revenues, including $113
million of supplemental appropriations (but excluding pooled financing
expenditures) totalled $16,162.9 million. Expenditures exceeded available
revenues and lapses by $253.2 million. The difference was funded from a planned
partial drawdown of the $437 million fiscal year adjusted beginning
unappropriated surplus.
Commonwealth revenues (prior to tax refunds) for fiscal 1996 increased by
$113.9 million over the prior year to $16,338.5 million (representing a growth
rate of .7 percent). Tax rate reductions and other tax law changes substantially
reduced the amount and rate of revenue growth for the fiscal year. It is
estimated the tax changes enacted for the fiscal year reduced Commonwealth
revenues by $283.4 million.
The enacted fiscal 1997 budget provides for expenditures from Commonwealth
revenues of $16,375.8 million, an increase of .6 percent over appropriated
amounts from Commonwealth revenues for fiscal 1996. The fiscal 1997 budget is
based on anticipated Commonwealth revenues (before refunds) of $16,744.5
million, an increase over actual fiscal 1996 revenues of 2.5 percent. The
revenue estimate includes provision for a $15 million tax credit program enacted
with the fiscal 1997 budget for businesses creating new jobs. Staggered
corporation tax years will cause fiscal 1997 revenues to continue to be affected
by the business tax reductions enacted during the two prior completed fiscal
years. Those reductions, together with the new jobs creation tax credit, cause
revenue growth comparisons between fiscal 1996 and 1997 to be understated. When
these tax changes are taken into account, revenues in the fiscal 1997 budget are
anticipated to increase at the rate of 3 percent. The fiscal 1997 revenue
estimate is based on a forecast of the national economy for real gross domestic
product to slow to a growth rate of 2 percent for 1996 and below 1.5 percent for
1997. This is based on the assumption that the Federal Reserve Board does not
cut interest rates and that foreign economic growth is weak. The consequence of
this economic scenario is a U.S. economy with very low growth, slow gains in
consumer spending, declining inflation rates, but increasing unemployment.
Increased authorized spending for fiscal 1997 is driven largely by increased
costs of the corrections and probation and payroll programs. The fiscal 1997
budget contains an appropriation increase in excess of $110 million for these
programs. The fiscal 1997 budget also contains some departmental restructurings.
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, 1996, the Commonwealth had $5,054.5 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,
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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.
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. Despite these changes, Puerto Rico's
economy has continued to grow. In fiscal year 1994 its real gross product rose
2.6% and in fiscal year 1995 it rose 3.3%. The number of jobs Puerto Ricans hold
has also increased, by 1.8% in fiscal year 1994 and 2.1% in 1995. In 1993, the
Senate approved NAFTA, which poses 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 an NRSRO; 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 an NRSRO.
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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, equity securities or other liquid,
unencumbered assets, marked-to-market daily, 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
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account, sell the futures contract underlying the put option or purchase a
similar put option. In instances involving the purchase of a call option on a
futures contract, the series will deposit in a segregated account with the
Fund's Custodian an amount in cash, U.S. government obligations, equity
securities or other liquid, unencumbered assets, marked-to-market daily
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, equity securities or other liquid,
unencumbered assets, marked-to-market daily 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
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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, U.S. Government
obligations, equity securities or other liquid, unencumbered assets 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
other assets 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.
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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, 1996, 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...................................................................... 68%
Hawaii Income................................................................ 18%
Maryland..................................................................... 42%
Massachusetts................................................................ 18%
Michigan..................................................................... 36%
New Jersey................................................................... 62%
New York..................................................................... 92%
North Carolina............................................................... 23%
Ohio......................................................................... 35%
Pennsylvania................................................................. 26%
</TABLE>
ILLIQUID SECURITIES
A series may hold 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.
Securities of financially and operationally troubled obligors (distressed
securities) are less liquid and are more volatile than securities of companies
not experiencing financial difficulties. A series might have to sell portfolio
securities at a disadvantageous time or at a disadvantageous price in order to
maintain no more than 15% (or 10%) of its net assets in illiquid securities.
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
B-20
<PAGE>
the security, the method of soliciting offers and the mechanics of the
transfer). With respect to municipal lease obligations, the investment adviser
also considers: (1) the willingness of the municipality to continue, annually or
biannually, to appropriate funds for payment of the lease, (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease, (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled,
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold, (iii) the strength of the lessee's general credit (E.G., its
debt, administrative, economic and financial characteristics), (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (E.G., the potential for an event of
non-appropriation) and (v) the legal recourse in the event of failure to
appropriate and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser.
REPURCHASE AGREEMENTS
The series' repurchase agreements will be collateralized by U.S. Government
obligations. The series will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees. The
Fund's investment adviser will monitor the creditworthiness of such parties
under the general supervision of the Trustees. In the event of a default or
bankruptcy by a seller, the series will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the series will suffer a loss.
The series participate in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management LLC (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 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
The Fund on behalf of a series may pledge up to 33 1/3% of the value of its
total assets to secure such borrowings. A series will not purchase portfolio
securities if its borrowings exceed 5% of the assets. For purposes of this
restriction, the preference
B-21
<PAGE>
as to shares of a series in liquidation and as to dividends over all other
series of the Fund with respect to assets specifically allocated to that
series, the purchase and sale of futures contracts and related options,
collateral arrangements with respect to margin for futures contracts, the
writing of related options (except with respect to the Connecticut Money
Market Series, the Massachusetts Money Market Series, the New York Money
Market Series and the New Jersey Money Market Series) and obligations of the
Fund to Trustees pursuant to deferred compensation arrangements, are not
deemed to be a pledge of assets or the issuance of a senior security.
4. Purchase any security if as a result, with respect to 75% of a
series' total assets (except with respect to the Connecticut Money Market
Series, the Florida Series, the Hawaii Income Series, the Massachusetts
Money Market Series, the New Jersey Money Market Series and the New York
Income Series), more than 5% of the total assets of any series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and
interest either by the U.S. Government or its agencies or
instrumentalities).
5. Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, although it may purchase and sell financial
futures contracts and related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series),
securities which are secured by real estate and securities of companies
which invest or deal in real estate.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
7. Invest in interests in oil, gas or other mineral exploration or
development programs.
8. Make loans, except through repurchase agreements.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
B-22
<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(71)............... Trustee President and Director of BMC Fund, Inc., a
c/o Prudential Mutual Fund closed-end investment company; previously,
Management LLC Vice Chairman of Broyhill Furniture
Gateway Center Three Industries, Inc.; Certified Public
Newark, NJ Accountant; Secretary and Treasurer of
Broyhill Family Foundation, Inc.; 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.; President and
Director of Global Utility Fund, Inc.
Eugene C. Dorsey(69).............. Trustee Retired President, Chief Executive Officer
c/o Prudential Mutual Fund and Trustee of the Gannett Foundation (now
Management LLC Freedom Forum); former Publisher of four
Gateway Center Three Gannett newspapers and Vice President of
Newark, NJ Gannett Company; past Chairman of
Independent Sector (national 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(58).......... Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management LCC
Gateway Center Three
Newark, NJ
*Robert F. Gunia(49)............... Trustee Chief Administrative Officer (July
Gateway Center Three 1990-September 1996), Director (January
Newark, NJ 1989-September 1996), Executive Vice
President, Treasurer and Chief Financial
Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.;
Comptroller of Prudential Investments
(since May 1996); Senior Vice President
(since March 1987) of Prudential Securities
Incorporated (Prudential Securities); Vice
President and Director of The Asia Pacific
Fund, Inc. (since May 1989).
*Harry A. Jacobs, Jr.(75).......... Trustee Senior Director (since January 1986) of
One New York Plaza Prudential Securities; formerly Interim
New York, NY Chairman and Chief Executive Officer of
Prudential Mutual Fund Management, Inc.
(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. and The First Australia Prime Income
Fund, Inc.; Trustee of the Trudeau
Institute.
</TABLE>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with The Prudential Insurance Company of America (Prudential)
or Prudential Securities.
B-23
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST 5 YEARS
- ----------------------------------- ------------------ ---------------------------------------------
<S> <C> <C>
Donald D. Lennox(77).............. Trustee Chairman (since February 1990) and Director
c/o Prudential Mutual Fund (since April 1989) of International Imaging
Management LLC Materials, Inc.; Retired Chairman, Chief
Gateway Center Three Executive Officer and Director of Shlegel
Newark, NJ Corporation (industrial
manufacturing)(March 1987-February 1989);
Director of Gleason Corporation, Personal
Sound Technologies, Inc. and The High Yield
Income Fund, Inc.
*Mendel A. Melzer(35).............. Trustee Chief Investment Officer (since October 1996)
751 Broad Street of Prudential Mutual Funds; formerly Chief
Newark, NJ Financial Officer of Prudential Investments
(November 1995-September 1996), Senior Vice
President and Chief Financial Officer of
Prudential Preferred Financial Services
(April 1993-November 1995), Managing
Director of Prudential Investment Advisors
(April 1991-April 1993) and Senior Vice
President of Prudential Capital Corporation
(July 1989-April 1991).
Thomas T. Mooney(54).............. Trustee President of the Greater Rochester Metro
c/o Prudential Mutual Fund Chamber of Commerce; formerly Rochester City
Management LLC Manager; Trustee of Center for Governmental
Gateway Center Three Research, Inc.; Director of Monroe County
Newark, NJ Water Authority, 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. and The
High Yield Plus Fund, Inc.
Thomas H. O'Brien(71)............. Trustee President of O'Brien Associates (Financial
c/o Prudential Mutual Fund and Management Consultants) (since April
Management LLC 1984); formerly President of Jamaica Water
Gateway Center Three Securities Corp. (holding company)
Newark, NJ (February 1989-August 1990); Chairman of
the Board and Chief Executive Officer
(September 1987-February 1989) of Jamaica
Water Supply Company and Director
(September 1987-April 1991); Director of
Ridgewood Savings Bank; Trustee of Hofstra
University.
*Richard A. Redeker(53)............ President and Employee of Prudential Investments; formerly
Gateway Center Three Trustee President, Chief Executive Officer and
Newark, NJ Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.;
Executive Vice President, Director and
Member of Operating Committee (October
1993-September 1996), Prudential
Securities; Director (since October
1993-September 1996), Prudential Securities
Group, Inc.; Executive Vice President, The
Prudential Investment Corporation (since
January 1994); previously Senior Executive
Vice President and Director of Kemper
Financial Services, Inc. (September
1978-September 1993); President and
Director of The High Yield Income Fund,
Inc.
</TABLE>
- --------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential or Prudential Securities.
B-24
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST 5 YEARS
- ----------------------------------- ------------------ ---------------------------------------------
<S> <C> <C>
Nancy H. Teeters(66).............. Trustee Economist; formerly Vice President and Chief
c/o Prudential Mutual Fund Economist (March 1986-June 1990) of
Management LLC International Business Machines
Gateway Center Three Corporation; Director of Inland Steel
Newark, NJ Industries (since July 1991) and First
Financial Fund, Inc.
Louis A. Weil, III(55)............ Trustee Publisher and Chief Executive Officer (since
c/o Prudential Mutual Fund January 1996) and Director (since September
Management LLC 1991) of Central Newspapers, Inc.; Chairman
Gateway Center Three of the Board (since January 1996),
Newark, NJ Publisher and Chief Executive Officer
(August 1991-December 1995) of Phoenix
Newspapers, Inc.; prior thereto, Publisher
of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief
Executive Officer of The Detroit News
(February 1986-August 1989); formerly
member of the Advisory Board, Chase
Manhattan Bank--Westchester.
S. Jane Rose(50).................. Secretary Senior Vice President (January 1991-September
Gateway Center Three 1996) and Senior Counsel (June 1987-September
Newark, NJ 1996) of Prudential Mutual Fund Management,
Inc.; Senior Vice President and Senior
Counsel (since June 1992) of Prudential
Securities; formerly Vice President and
Associate General Counsel of Prudential
Securities.
Grace Torres(37).................. Treasurer and First Vice President (March 1994-September
Gateway Center Three Principal 1996) of Prudential Mutual Fund Management,
Newark, NJ Financial and Inc.; First Vice President (since March
Accounting 1994) of Prudential Securities; prior
Officer thereto, Vice President of Bankers Trust
Corporation.
Stephen M. Ungerman(43)........... Assistant First Vice President of Prudential Mutual
Gateway Center Three Treasurer Fund Management, Inc. (February
Newark, NJ 1993-September 1996); Tax Director of
Prudential Investments and the Private
Asset Group of Prudential (since March
1996); prior thereto, Senior Tax Manager of
Price Waterhouse (1981-January 1993).
Deborah A. Docs(38)............... Assistant Vice President and Associate General Counsel
Gateway Center Three Secretary (January 1993-September 1996) of Prudential
Newark, NJ Mutual Fund Management, Inc.; Vice
President and Associate General Counsel
(since January 1993) of Prudential
Securities; previously Associate Vice
President (January 1990-December 1992) and
Assistant General Counsel (November 1991-
December 1992) of Prudential Mutual Fund
Management, Inc.
</TABLE>
B-25
<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.
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, Lennox
and O'Brien are scheduled to retire on December 31, 1999, 1998, 1997 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, 1996 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, 1995.
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 $183,500(22/43)**
Eugene C. Dorsey, Trustee.......... $9,000 None N/A $ 85,783*(10/34)**
Delayne Dedrick Gold, Trustee...... $9,000 None N/A $183,250(24/45)**
Robert F. Gunia, Trustee........... -- -- -- --
Harry A. Jacobs, Jr., Trustee...... $ 0 None N/A $ 0
Donald D. Lennox, Trustee.......... -- -- -- $ 86,250(10/22)**
Mendel A. Melzer, Trustee.......... -- -- -- --
Thomas T. Mooney, Trustee.......... $9,000 None N/A $125,625(14/19)**
Thomas H. O'Brien, Trustee......... $9,000 None N/A $ 44,000(6/24)**
Richard A. Redeker, Trustee........ $ 0 None N/A $ 0
Nancy H. Teeters, Trustee.......... $9,000 None N/A $107,500(13/31)**
Louis A. Weil, III, Trustee........ -- -- -- $ 93,750(11/16)**
</TABLE>
- --------------
* All compensation for the calendar year ended December 31, 1995 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended August 31, 1996, including accrued interest, amounted to $10,238.
Aggregate compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1995, including accrued interest, amounted
to approximately $85,783.
** Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
B-26
<PAGE>
As of October 4, 1996, 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 4, 1996, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were those listed in Appendix IV.
As of October 4, 1996, 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.................. 8,006,536 (80%) 1,372,428 (90%) 678,844 (88%)
Hawaii Income............ 147,115 (43%) 744,871 (90%) 113,856 (96%)
Maryland................. 976,215 (55%) 889,594 (55%) 3,510 (81%)
Massachusetts............ 1,413,864 (56%) 925,349 (49%) 3,811 (96%)
Michigan................. 1,187,169 (47%) 1,226,997 (43%) 5,631 (58%)
New Jersey............... 6,152,969 (79%) 12,519,708 (78%) 152,187 (83%)
New York................. 9,085,934 (62%) 7,238,798 (65%) 57,943 (88%)
North Carolina........... 1,788,202 (69%) 2,052,077 (77%) 3,603 (55%)
Ohio..................... 2,274,936 (52%) 2,036,899 (49%) 2,201 (58%)
Pennsylvania............. 3,788,116 (51%) 6,309,538 (42%) 43,522 (56%)
</TABLE>
As of October 4, 1996, Prudential Securities was the record holder for other
beneficial owners of 74,667,814 shares (or 99% of those outstanding) of the
Connecticut Money Market Series, 52,114,145 shares (or 99% of those outstanding)
of the Massachusetts Money Market Series, 187,346,830 shares (or 99% of those
outstanding) of the New Jersey Money Market Series and 330,536,519 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 LLC (PMF or the
Manager), Gateway Center Three, Newark, New Jersey 07102. 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, 1996,
PMF managed and/or administered open-end and closed-end management investment
companies with assets of approximately $52 billion. According to the Investment
Company Institute, as of August 31, 1996, the Prudential Mutual Funds were the
17th largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and 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. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian), the Fund's custodian, and
PMFS, the Fund's transfer and dividend disbursing agent. The management services
of PMF for the Fund are not exclusive under the terms of the Management
Agreement and PMF is free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management
B-27
<PAGE>
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, 1996. 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 9, 1996 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, 1994, 1995 and 1996 was as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Connecticut Money Market............................................... $ 63,440(a) $ 71,379(a) $ 372,880(a)
Florida................................................................ 311,558(b) 231,778(b) 665,643(b)
Hawaii Income.......................................................... N/A 41,133(c) 71,610(c)
Maryland............................................................... 290,509 210,311(d) 192,126(d)
Massachusetts.......................................................... 310,614 258,040(e) 269,415(e)
Massachusetts Money Market............................................. 44,800(f) 53,649(f) 273,444(f)
Michigan............................................................... 383,005 323,133(g) 335,620(g)
New Jersey............................................................. 1,347,284(h) 1,047,300(h) 1,429,531(h)
New Jersey Money Market................................................ 634,767(i) 642,087(i) 963,088(i)
New York............................................................... 1,820,106 1,518,552(j) 1,608,029(j)
New York Money Market.................................................. 1,402,462 1,463,815 1,682,136
North Carolina......................................................... 378,373 313,847(k) 316,510(k)
Ohio................................................................... 630,490 538,657(l) 546,058(l)
Pennsylvania........................................................... 1,384,548 1,182,799(m) 1,253,004(m)
</TABLE>
- ------------------------
(a) PMF voluntarily waived all or a portion of its management fee of $243,395,
$214,138 and $279,660, respectively.
(b) PMF voluntarily waived a portion of its management fee of $467,337,
$464,337 and $417,808, respectively.
(c) PMF voluntarily waived a portion of its management fee of $3,651 and
$7,161, respectively.
(d) PMF voluntarily waived a portion of its management fee of $14,170 and
$19,213, respectively.
(e) PMF voluntarily waived a portion of its management fee of $18,492 and
$26,941, respectively.
(f) PMF voluntarily waived all or a portion of its management fee of $167,335,
$160,946 and $205,083, respectively.
(g) PMF voluntarily waived a portion of its management fee of $22,911 and
$33,562, respectively.
(h) PMF voluntarily waived a portion of its management fee of $449,095,
$483,073 and $266,868, respectively.
(i) PMF voluntarily waived a portion of its management fee of $211,404,
$214,029 and $85,123, respectively.
(j) PMF voluntarily waived a portion of its management fee of $108,361 and
$160,803, respectively.
(k) PMF voluntarily waived a portion of its management fee of $22,350 and
$31,651, respectively.
(l) PMF voluntarily waived a portion of its management fee of $38,218 and
$54,606, respectively.
(m) PMF voluntarily waived a portion of its management fee of $84,187 and
$125,300, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services.
Peter Allegrini oversees the municipal bond team at the Subadviser. He also
serves as the portfolio manager of the High Yield Series of Prudential Municipal
Bond Fund and the Pennsylvania Series of the Fund. He has been in the investment
business since 1978.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company
B-29
<PAGE>
Act, on May 9, 1996, by shareholders of each series of the Fund then in
existence on December 28, 1988, by shareholders of the Florida Series and the
New Jersey Money Market Series on December 30, 1991, by shareholders of the
Connecticut Money Market Series and the Massachusetts Money Market Series on
November 10, 1992 and by the sole shareholder of the Hawaii Income Series on
September 19, 1994.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specified projects and to evaluate the progress of construction or the
operation of a facility.
DISTRIBUTOR
Prudential Securities, One Seaport Plaza, New York, New York 10292, acts as
the distributor of the shares of the Fund. Prior to January 2, 1996, Prudential
Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New York, New York
10292, acted 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.
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
for the money market series and the other series (the Distribution Agreements),
Prudential Securities (the Distributor) incurs the expenses of distributing
shares of the money market series and the Fund's Class A, Class B and Class C
shares. Prudential Securities also incurs the expenses of distributing the
Fund's Class Z shares under the Distribution Agreement, none of which is
reimbursed by or paid for by the Fund. 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
B-30
<PAGE>
(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 C shares. The Plans were last approved by the
Trustees, including a majority of the Rule 12b-1 Trustees, on May 9, 1996. The
Class A Plan, as amended, was approved by Class A and Class B shareholders, the
Class B Plan was approved by Class B shareholders and the Class C Plan was
approved by the Class C shareholders on July 19, 1994. The Florida Series' Class
C Plan was approved by the sole shareholder of the Class C shares of the Florida
Series on June 30, 1993. The Class B Plan was approved by the sole shareholder
of the Florida Series' Class B shares on August 1, 1994. The Class A Plan and
Class B Plan were approved by the sole shareholder of Class A and Class B shares
of the Hawaii Income Series on September 19, 1994. The Class C Plan was approved
by the sole shareholder of Class C shares of the Hawaii Income Series on
September 19, 1994 and of the other series having Class C shares on August 1,
1994.
CLASS A PLAN. For the fiscal year ended August 31, 1996, PMFD and
Prudential Securities received the following payments under the Class A Plan:
<TABLE>
<CAPTION>
SERIES
- --------------------------------------------------------------------------------
<S> <C>
Florida......................................................................... $ 112,266
Hawaii Income................................................................... 3,620
Maryland........................................................................ 18,483
Massachusetts................................................................... 28,091
Michigan........................................................................ 27,978
New Jersey...................................................................... 61,836
New York........................................................................ 168,291
North Carolina.................................................................. 27,628
Ohio............................................................................ 51,205
Pennsylvania.................................................................... 59,995
</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, 1996, PMFD and Prudential Securities also received
approximate initial sales charges with respect to the sale of Class A shares as
follows:
<TABLE>
<CAPTION>
SERIES
- --------------------------------------------------------------------------------
<S> <C>
Florida......................................................................... $ 101,700
Hawaii Income................................................................... 7,200
Maryland........................................................................ 4,400
Massachusetts................................................................... 6,700
Michigan........................................................................ 10,900
New Jersey...................................................................... 16,300
New York........................................................................ 44,000
North Carolina.................................................................. 2,600
Ohio............................................................................ 6,200
Pennsylvania.................................................................... 24,600
</TABLE>
B-31
<PAGE>
CLASS B PLAN. For the fiscal year ended August 31, 1996, 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 as set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
CONTINGENT
DEFERRED
SERIES AMOUNT OF FEE SALES CHARGES
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Florida........................................................ $ 62,850 $ 62,000
Hawaii Income.................................................. 47,993 37,500
Maryland....................................................... 99,492 33,400
Massachusetts.................................................. 128,755 41,400
Michigan....................................................... 195,258 73,900
New Jersey..................................................... 1,111,674 383,900
New York....................................................... 763,278 317,700
North Carolina................................................. 178,025 109,600
Ohio........................................................... 289,546 116,600
Pennsylvania................................................... 949,510 285,600
</TABLE>
For the fiscal year ended August 31, 1996, it is estimated that Prudential
Securities spent approximately the following amounts:
<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............. $ 100 $ 98,200 $ 174,200 $ 6,700 $ 279,200
Hawaii Income....... 10,600 32,900 59,500 1,200 104,200
Maryland............ 100 31,900 14,200 11,400 57,600
Massachusetts....... 100 40,700 34,500 14,500 89,800
Michigan............ 100 46,100 24,000 38,800 109,000
New Jersey.......... 100 311,600 188,700 72,500 572,900
New York............ 100 254,700 218,300 174,300 647,400
North Carolina...... 100 53,100 42,500 25,300 121,000
Ohio................ 100 71,500 38,400 64,300 174,300
Pennsylvania........ 100 245,500 155,900 220,200 621,700
</TABLE>
- ------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Prusec in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communication costs and
the costs of stationery and supplies, (b) the cost of client sales seminars, (c)
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (d) other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus of each applicable series of the Fund. The amount of
distribution expenses reimbursable by the Fund is reduced by the amount of such
contingent deferred sales charges.
B-32
<PAGE>
CLASS C PLAN. For the fiscal year ended August 31, 1996, 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 as set forth below:
<TABLE>
<CAPTION>
APPROXIMATE
CONTINGENT
DEFERRED
SALES
SERIES AMOUNT OF FEE CHARGES
- -------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Florida....................................................... $ 62,195 $ 300
Hawaii Income................................................. 8,274 200
Maryland...................................................... 324 200
Massachusetts................................................. 304 --
Michigan...................................................... 711 --
New Jersey.................................................... 13,012 2,200
New York...................................................... 4,941 --
North Carolina................................................ 1,000 --
Ohio.......................................................... 730 --
Pennsylvania.................................................. 5,277 --
</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 9, 1996.
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 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 9, 1996. The Trustees approved the transfer of the
Distribution Agreement with PMFD for the money market series to Prudential
Securities effective January 2, 1996.
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 9, 1996. 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
B-33
<PAGE>
Market Series on November 10, 1992. For the fiscal year ended August 31, 1996,
PMFD and Prudential Securities incurred distribution expenses with respect to
the money market series, all of which were recovered by PMFD and Prudential
Securities through the distribution fee paid by the series, as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
SERIES EXPENSES
- ----------------------------------------------------------------------------------------- ------------
<S> <C>
Connecticut Money Market................................................................. $ 93,220
Massachusetts Money Market............................................................... 68,361
New Jersey Money Market.................................................................. 240,772
New York Money Market.................................................................... 420,534
</TABLE>
On October 21, 1993, Prudential Securities (PSI) entered into an omnibus
settlement with the SEC, state securities regulators in 51 jurisdictions and the
NASD to resolve allegations that PSI sold interests in more than 700 limited
partnerships (and a limited number of other types of securities) from January 1,
1980 through December 31, 1990, in violation of securities laws to persons for
whom such securities were not suitable in light of the individuals' financial
condition or investment objectives. It was also alleged that the safety,
potential returns and liquidity of the investments had been misrepresented. The
limited partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order issued
by the SEC in 1986 requiring PSI to adopt, implement and maintain certain
supervisory procedures had not been complied with; (ii) directed PSI to cease
and desist from violating the federal securities laws and imposed a $10 million
civil penalty; and (iii) required PSI to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of Directors.
Pursuant to the terms of the SEC settlement, PSI established a settlement fund
in the amount of $330,000,000 and procedures, overseen by a court approved
Claims Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
B-34
<PAGE>
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a series may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of a series of the Fund rather than on a per shareholder
basis. If aggregate sales charges were to exceed 6.25% of total gross sales of
any class of any series, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures and options thereon for each series of the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions. The term "Manager" as used in this
section includes the Subadviser. Purchases and sales of securities on a
securities exchange, which are not expected to be a significant portion of the
portfolio securities of any series, are effected through brokers who charge a
commission for their services. Broker-dealers may also receive commissions in
connection with options and futures transactions, including the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, Prudential Securities and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with Prudential
Securities in any transaction in which Prudential Securities acts as principal.
Thus it will not deal in over-the-counter securities with Prudential Securities
acting as a market maker, and it will not execute a negotiated trade with
Prudential Securities if execution involves Prudential Securities' acting as
principal with respect to any part of the Fund's order.
In placing orders for portfolio securities for each series of the Fund, the
Manager is required to give primary consideration to obtaining the most
favorable price and efficient execution. The Manager seeks to effect each
transaction at a price and commission, if any, that provides the most favorable
total cost or proceeds reasonably attainable in the circumstances. Within the
framework of this policy, the Manager will consider the research and investment
services provided by brokers, dealers or futures commission merchants who effect
or are parties to portfolio transactions of the Fund, the Manager or the
Manager's other clients. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. Such services are used by the Manager in connection with all of its
investment activities, and some of such services obtained in connection with the
execution of transactions for the Fund may be used in managing other investment
accounts. Conversely, brokers, dealers or futures commission merchants
furnishing such services may be selected for the execution of transactions of
such other accounts, whose aggregate assets are far larger than the Fund, and
the services furnished by such brokers, dealers or futures commission merchants
may be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker based
on the quality and quantity of execution services provided by the broker, dealer
or futures commission merchant in the light of generally prevailing rates. The
Manager's policy is to pay higher commissions to brokers, other than Prudential
Securities, for particular transactions than might be charged if a different
broker had been selected, on occasions when, in the Manager's opinion, this
policy furthers the objective of obtaining best price and execution. The Manager
is authorized to pay higher commissions on brokerage transactions for the Fund
to brokers other than Prudential Securities in order to secure the research and
investment services described above, subject to review by the Fund's Trustees
from
B-35
<PAGE>
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.
During the fiscal years ended August 31, 1996, 1995 and 1994, the series
paid brokerage commissions on certain options and futures transactions as set
forth below. During these periods, the series paid no brokerage commissions to
Prudential Securities.
<TABLE>
<CAPTION>
BROKERAGE COMMISSIONS
-------------------------------
SERIES 1996 1995 1994
- ----------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Connecticut Money Market..................................................... 0 0 0
Florida...................................................................... $ 7,438 $ 10,973 $ 4,113
Hawaii Income................................................................ 1,120 1,680 N/A
Maryland..................................................................... 3,413 5,513 613
Massachusetts................................................................ 3,413 1,820 263
Massachusetts Money Market................................................... 0 0 0
Michigan..................................................................... 4,498 4,550 2,030
New Jersey................................................................... 15,839 17,098 875
New Jersey Money Market...................................................... 0 0 0
New York..................................................................... 22,540 13,581 0
New York Money Market........................................................ 0 0 0
North Carolina............................................................... 6,651 20,213 175
Ohio......................................................................... 9,468 15,698 4,953
Pennsylvania................................................................. 20,685 22,033 875
</TABLE>
B-36
<PAGE>
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) Class Z shares of the Florida Series, the New Jersey
Series and the New York Series are offered to a limited group of investors at
net asset value without any sales charges. See "Shareholder Guide--How to Buy
Shares of the Fund" in each series' Prospectus.
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 is
subject to different sales charges and distribution and/or service fees (except
for Class Z shares, which are not subject to any sales charges and distribution
and/or service fees), which may affect performance, (ii) each class has
exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account-- Exchange Privilege."
For a description of the methods of purchasing shares of the Connecticut
Money Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series or the New York Money Market Series, see "Shareholder Guide--How
to Buy Shares of the Fund" in the money market series' Prospectuses.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B*, Class C* and Class Z** shares are sold at net asset value. Using the net
asset value at August 31, 1996 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.......................... $10.11 $12.00 $10.74 $11.54 $11.72 $10.87 $11.77 $11.06 $11.70 $10.49
Maximum sales charge (3% of offering
price)................................. .31 .37 .33 .36 .36 .34 .36 .34 .36 .32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Offering price to public................ $10.42 $12.37 $11.07 $11.90 $12.08 $11.21 $12.13 $11.40 $12.06 $10.81
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<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*................................. $10.11 $12.00 $10.75 $11.53 $11.71 $10.87 $11.77 $11.06 $11.71 $10.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<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*................................. $10.11 $12.00 $10.75 $11.53 $11.71 $10.87 $11.77 $11.06 $11.71 $10.49
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS Z FL NJ NY
- ---------------------------------------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class Z
share**................................ $10.11 $10.87 $11.77
------ ------ ------
------ ------ ------
</TABLE>
- --------------
*Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus of each
applicable series.
**Class Z shares did not exist at August 31, 1996.
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
B-37
<PAGE>
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.
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
B-38
<PAGE>
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.
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.
B-39
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a series. An investor
may direct the Transfer Agent in writing by the first business day of the month
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at net asset value (without a sales charge) by returning the check
or the proceeds to the Transfer Agent within 30 days after the payment date. The
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholder will
receive credit for any contingent deferred sales charge paid in connection with
the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each series makes available to its shareholders the privilege of exchanging
their shares of a series for shares of other series of the Fund and certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential Mutual Funds may also be exchanged for
shares of the Fund. All exchanges are made on the basis of relative net asset
value next determined after receipt of an order in proper form. An exchange will
be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of other series of the Fund or certain other Prudential Mutual
Funds, shares of Prudential Government Securities Trust (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, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
B-40
<PAGE>
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, Inc., 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, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
In order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month.Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of a series, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C Exchange Privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares of other funds, respectively, without being subject to
any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
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
B-41
<PAGE>
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
</TABLE>
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.
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.
B-42
<PAGE>
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan.
HOW TO REDEEM SHARES OF THE MONEY MARKET SERIES
Redemption orders submitted to and received by Prudential Mutual Fund
Services, Inc. (PMFS) will be effected at the net asset value next determined
after receipt of the order. Shareholders of the Connecticut Money Market Series,
the Massachusetts Money Market Series, the New Jersey Money Market Series and
the New York Money Market Series (other than Prudential Securities clients for
whom Prudential Securities has purchased shares of such Series) may use Check
Redemption, Expedited Redemption or Regular Redemption.
CHECK REDEMPTION
Shareholders are subject to the Custodian's rules and regulations governing
checking accounts, including the right of the Custodian not to honor checks in
amounts exceeding the value of the shareholder's account at the time the check
is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 10 days after receipt of the purchase check by PMFS unless
the Fund or PMFS has been advised that the purchase check has been honored. Such
delay may be avoided by purchasing shares by certified or official bank checks
or by wire. If insufficient shares are in the account, or if the purchase was
made by check within 10 days, the check is returned marked "insufficient funds."
Since the dollar value of an account is constantly changing, it is not possible
for a shareholder to determine in advance the total value of his or her account
so as to write a check for the redemption of the entire account. Checks in an
amount less than $500 will not be honored.
There is a service charge of $5.00 payable to PMFS to establish a checking
account and to order checks. The Custodian and the Fund have reserved the right
to modify this checking account privilege or to impose a charge for each check
presented for payment for any individual account or for all accounts in the
future.
The Fund or PMFS may terminate Check Redemption at any time upon 30 days'
notice to participating shareholders. To receive further information, contact
Prudential Mutual Fund Services, Inc., Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010.
EXPEDITED REDEMPTION
To request Expedited Redemption by telephone, a shareholder should call PMFS
at (800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time. Requests by letter should be addressed to Prudential Mutual Fund Services,
Inc., Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015.
In order to change the name of the commercial bank or account designated to
receive redemption proceeds, it is necessary to execute a new Expedited
Redemption Authorization Form and submit it to PMFS at the address set forth
above. Requests to change a bank or account must be signed by each shareholder
and each signature must be guaranteed by: (a) a commercial bank which is a
member of the Federal Deposit Insurance Corporation; (b) a trust company; or (c)
a member firm of a domestic securities exchange. Guarantees must be signed by an
authorized signatory of the bank, trust company or member firm, and "Signature
Guaranteed" should appear with the signature. Signature guarantees by savings
banks, savings and loan associations and notaries will not be accepted. PMFS may
request further documentation from corporations, executors, administrators,
trustees or guardians.
To receive further information, investors should contact PMFS at (800)
225-1852.
B-43
<PAGE>
REGULAR REDEMPTION
Shareholders may redeem their shares by sending to PMFS, at the address set
forth above, a written request, accompanied by duly endorsed share certificates,
if issued. If the proceeds of the redemption (a) exceed $50,000, (b) are to be
paid to a person other than the record owner, (c) are to be sent to an address
other than the address on the Transfer Agent's records or (d) are to be paid to
a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential District or Ordinary offices. The Fund may change the
signature guarantee requirements from time to time on notice to shareholders,
which may be given by means of a new Prospectus. All correspondence concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010. Regular redemption is made by check sent to
the shareholder's address.
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 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
B-44
<PAGE>
securities owned by the Fund, it is likely that most of the valuations for such
securities will be based upon fair value determined under the foregoing
procedures. Short-term investments which mature in less than 60 days are valued
at amortized cost, if their original term to maturity was less than 60 days, or
are valued at amortized cost on the 60th day prior to maturity, if their
original term to maturity when acquired by the Fund was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
The money market series use the amortized cost method to determine the value
of their portfolio securities in accordance with regulations of the SEC. The
amortized cost method involves valuing a security at its cost and amortizing any
discount or premium over the period until maturity. The method does not take
into account unrealized capital gains and losses which may result from the
effect of fluctuating interest rates on the market value of the security.
With respect to the money market series, the Trustees have determined to
maintain a dollar-weighted average portfolio maturity of 90 days or less, to
purchase instruments having remaining maturities of thirteen months or less and
to invest only in securities determined by the investment adviser under the
supervision of the Trustees to present minimal credit risks and to be of
"eligible quality" in accordance with regulations of the SEC. The Trustees have
adopted procedures designed to stabilize, to the extent reasonably possible, the
money market series' price per share as computed for the purpose of sales and
redemptions at $1.00. Such procedures will include review of the money market
series' portfolio holdings by the Trustees, at such intervals as they may deem
appropriate, to determine whether the money market series' net asset value
calculated by using available market quotations deviates from $1.00 per share
based on amortized cost. The extent of any deviation will be examined by the
Trustees. If such deviation exceeds 1/2 of 1%, the Trustees will promptly
consider what action, if any, will be initiated. In the event the Trustees
determine that a deviation exists which may result in material dilution or other
unfair results to prospective investors or existing shareholders, the Trustees
will take such corrective action as they consider necessary and appropriate,
including the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity, the withholding of
dividends, redemptions of shares in kind, or the use of available market
quotations to establish a net asset value per share.
PERFORMANCE INFORMATION
ALL SERIES (EXCEPT THE MONEY MARKET SERIES)
YIELD. Each series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z 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
B-45
<PAGE>
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, 1996 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............. 5.32% 5.12% 5.08% 4.87% 4.82% 4.61%
Hawaii Income....... 5.14 3.36 4.90 3.07 4.65 2.82
Maryland............ 4.66 4.61 4.40 4.35 4.15 4.10
Massachusetts....... 4.62 4.57 4.36 4.31 4.10 4.05
Michigan............ 4.79 4.74 4.54 4.48 4.28 4.22
New Jersey.......... 4.94 4.89 4.69 4.63 4.44 4.38
New York............ 4.80 4.75 4.54 4.49 4.29 4.24
North Carolina...... 4.71 4.66 4.45 4.40 4.20 4.15
Ohio................ 4.54 4.49 4.28 4.22 4.04 3.98
Pennsylvania........ 4.89 4.84 4.64 4.59 4.38 4.33
</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 then added to the portion of
the yield that is attributable to other securities. For the 30 days ended August
31, 1996, 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......... 8.31% 7.99% 7.94% 7.61% 7.53% 7.21%
Hawaii Income... 8.92 5.84 8.51 5.32 8.07 4.89
Maryland........ 7.75 7.66 7.31 7.23 6.90 6.81
Massachusetts... 8.20 8.11 7.74 7.64 7.28 7.19
Michigan........ 7.83 7.74 7.42 7.32 7.00 6.90
New Jersey...... 8.26 8.17 7.84 7.75 7.43 7.33
New York........ 8.14 8.05 7.70 7.61 7.28 7.19
North
Carolina....... 7.98 7.89 7.54 7.45 7.11 7.02
Ohio............ 7.67 7.58 7.23 7.13 6.82 6.73
Pennsylvania.... 7.86 7.79 7.46 7.37 7.04 6.96
</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, Class C and Class Z shares. See "How
the Fund Calculates Performance" in the Prospectus of each applicable series.
B-46
<PAGE>
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return and subsidy/waiver adjusted average annual
total return for the series (other than the money market series) for the periods
ended August 31, 1996 were as follows:
<TABLE>
<CAPTION>
CLASS B
---------------------------------------
CLASS A SUBSIDY/WAIVER
------------------------------------------------------------- ADJUSTED
SUBSIDY/WAIVER ------
ADJUSTED TEN
----------------------------- YEARS
ONE FIVE SINCE ONE FIVE SINCE ONE FIVE OR SINCE ONE
SERIES YEAR YEARS INCEPTION YEAR YEARS INCEPTION YEAR YEARS INCEPTION YEAR
- --------------- ------ ------ ----------- ------ ------ ----------- ------ ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida........ 3.0% N/A 7.3% 2.6% N/A 6.7% 0.8% N/A 4.9% 0.4%
Hawaii
Income........ 1.9 N/A 5.7 0.7 N/A 4.5 (0.4) N/A 5.0 (1.6)
Maryland....... 2.4 5.7% 6.2 2.3 5.7% 6.2 0.1 5.8% 6.1 0.1
Massachusetts... 1.8 6.6 6.9 1.7 6.6 6.9 (0.5) 6.6 6.4 (0.6)
Michigan....... 1.9 6.3 6.7 1.9 6.3 6.7 (0.3) 6.4 6.5 (0.4)
New Jersey..... 1.5 6.2 7.0 1.4 6.0 6.8 (0.8) 6.3 7.6 (0.9)
New York....... 1.4 6.6 7.0 1.3 6.6 7.0 (0.9) 6.6 6.2 (0.9)
North
Carolina...... 1.6 5.9 6.4 1.5 5.9 6.4 (0.7) 6.0 5.9 (0.8)
Ohio........... 0.9 6.3 6.8 0.8 6.2 6.8 (1.4) 6.3 6.1 (1.5)
Pennsylvania... 1.9 6.6 6.8 1.8 6.6 6.8 (0.3) 6.7 6.8 (0.4)
<CAPTION>
CLASS C
-----------------------------------------------
SUBSIDY/
WAIVER
TEN ADJUSTED
YEARS ----------------------
FIVE OR SINCE ONE SINCE ONE SINCE
SERIES YEARS INCEPTION YEAR INCEPTION YEAR INCEPTION
- --------------- -------- ------------ ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Florida........ N/A 4.5% 4.5% 4.3% 4.1% 3.8%
Hawaii
Income........ N/A 3.8 3.3 6.7 2.1 5.4
Maryland....... 5.8% 6.1 3.9 5.1 3.8 5.0
Massachusetts.. 6.6 6.3 3.3 5.6 3.2 5.6
Michigan....... 6.4 6.4 3.4 5.2 3.3 5.1
New Jersey..... 6.0 7.3 3.0 5.3 2.9 5.1
New York....... 6.6 6.2 2.8 5.2 2.7 5.2
North
Carolina...... 6.0 5.9 3.0 4.9 2.9 4.8
Ohio........... 6.3 6.1 2.4 5.0 2.3 5.0
Pennsylvania... 6.7 6.7 3.4 5.4 3.3 5.3
</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, Class C and Class Z shares. See "How the Fund Calculates
Performance" in the Prospectus of each applicable series.
Aggregate total return represents the cumulative change in the value of an
investment in a series of the Fund and is computed according to the following
formula:
ERV-P
------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods of a hypothetical $1,000 payment made at the beginning
of the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-47
<PAGE>
The aggregate total return for each series for the one year, five year and
ten year (or since inception) periods ended August 31, 1996 for the Class A,
Class B and Class C shares 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............. 6.2% 43.9% 53.8% 12/27/90 5.8% N/A 13.6% 8/1/94 5.5% 13.8%
Hawaii Income....... 5.0 N/A 14.9 9/19/94 4.6 N/A 14.0 9/19/94 4.3 13.5
Maryland............ 5.6 36.1 53.5 1/22/90 5.2 33.4 81.5 1/22/85 4.9 10.8
Massachusetts....... 4.9 41.6 60.6 1/22/90 4.5 38.6 85.3 9/19/84 4.3 12.1
Michigan............ 5.1 40.2 58.5 1/22/90 4.7 37.3 87.6 9/19/84 4.4 11.1
New Jersey.......... 4.6 39.3 61.6 1/22/90 4.2 36.7 85.8 3/1/88 4.0 11.3
New York............ 4.5 41.6 61.0 1/22/90 4.1 38.8 81.6 9/27/84 3.9 11.2
North Carolina...... 4.7 37.4 55.1 1/22/90 4.3 34.6 77.9 2/13/85 4.0 10.5
Ohio................ 4.0 39.6 59.0 1/22/90 3.6 36.8 81.6 9/19/84 3.4 10.7
Pennsylvania........ 5.1 42.0 59.6 1/22/90 4.7 39.2 85.0 3/6/87 4.4 11.5
<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 aggregate total return for each series for the one year, five year and
ten year (or since inception) periods ended August 31, 1996 for the Class A,
Class B and Class C shares, without the management subsidies and waivers, were
as follows:
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------- -----------------
CLASS A
------------------------- AGGREGATE TOTAL
AGGREGATE TOTAL RETURN
AGGREGATE TOTAL RETURN SUBSIDY/WAIVER
RETURN SUBSIDY/WAIVER ADJUSTED
SUBSIDY/WAIVER ADJUSTED ------------------------- ADJUSTED
------------------------- 10 YR. OR -----------------
SINCE SINCE SINCE
SERIES 1 YR. 5 YR. INCEPTION 1 YR. 5 YR. INCEPTION 1 YR. INCEPTION
- -------------------- ----- ----- --------- ----- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida............. 5.8% 40.0% 49.2% 5.4% N/A 12.5% 5.1% 12.1%
Hawaii Income....... 3.8 N/A 12.2 3.4 N/A 11.4 3.1 10.9
Maryland............ 5.4 36.0 53.4 5.0 33.3 80.2 4.8 10.7
Massachusetts....... 4.8 41.5 60.4 4.4 38.4 84.2 4.2 12.0
Michigan............ 5.0 40.1 58.4 4.6 37.2 86.8 4.3 11.0
New Jersey.......... 4.6 38.0 59.2 4.1 35.3 82.2 3.9 11.0
New York............ 4.4 41.5 60.9 4.0 38.7 81.5 3.8 11.1
North Carolina...... 4.6 37.2 55.0 4.2 34.5 76.6 3.9 10.4
Ohio................ 3.9 39.5 58.9 3.5 36.7 80.9 3.3 10.6
Pennsylvania........ 5.0 41.9 59.3 4.6 39.1 83.7 4.3 11.4
</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.
B-48
<PAGE>
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, 1996 was 4.8%, 4.6%, 4.6%
and 4.7%, respectively.
Comparative performance information may be used from time to time in
advertising or marketing the money market series' shares, including data from
Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report or other
industry publications.
The money market series' yield fluctuates, and an annualized yield quotation
is not a representation by the money market series as to what an investment in
the money market series will actually yield for any given period. Actual yields
will depend upon not only changes in interest rates generally during the period
in which the investment in the money market series is held, but also on any
realized or unrealized gains and losses and changes in the money market series'
expenses.
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>
<S> <C> <C>
Common Stocks Long-Term Govt. Bonds Inflation
10.2% 4.8% 3.1%
</TABLE>
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1995
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. 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. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
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
B-49
<PAGE>
him or her at the time of the redemption. The Fund's net investment income on
weekends, holidays and other days on which the Fund is closed for business will
be declared as a dividend on shares outstanding on the close of the last
business day on which the Fund was open for business. Accordingly, a shareholder
who redeems his or her shares effective as of 4:15 P.M. (4:30 P.M. for the money
market series), New York time, on a Friday earns a dividend which reflects the
income earned by the Fund on the following Saturday and Sunday. On the other
hand, an investor whose purchase order is effective as of 4:15 P.M. (4:30 P.M.
for the money market series), New York time, on a Friday does not begin earning
dividends until the following business day. Net investment income consists of
interest income accrued on portfolio securities less all expenses, calculated
daily.
Net realized capital gains, if any, will be distributed annually and, unless
the shareholder elects to receive them in cash, will be automatically received
in additional shares of a series.
The per share dividends on Class B shares and Class C shares of a series
will be lower than the per share dividends on Class A shares of the series as a
result of the higher distribution-related fee applicable to the Class B and
Class C shares. The per share distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B and Class C shares. See "Net
Asset Value."
Annually, the Fund will mail to shareholders information regarding the tax
status of dividends and distributions made by the Fund in the calendar year. The
Fund intends to report the proportion of all distributions that were tax-exempt
for that calendar year. The percentage of income designated as tax-exempt for
the calendar year may be substantially different from the percentage of the
Fund's income that was tax-exempt for a particular period.
FEDERAL TAXATION
Under the Internal Revenue Code, each series of the Fund is required to be
treated as a separate entity for federal income tax purposes.
Each series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under the requirements
of Subchapter M of the Internal Revenue Code for each taxable year. If so
qualified, each series will not be subject to federal income taxes on any net
investment income and capital gains, if any, realized during the taxable year
which are distributed to shareholders. 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 annual 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 or options thereon; (b) derive less
than 30% of its annual gross income from gains (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; (c) diversify its holdings so
that, at the end of each quarter of the taxable year (i) at least 50% of the
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 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); and (d) distribute to its
shareholders at least 90% of its net investment income and net short-term gains
(I.E., the excess of net short-term capital gains over net long-term capital
losses) in each year.
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
B-50
<PAGE>
Revenue Code) will be treated as 60% long-term and 40% short-term capital gain
or loss. On the last trading day of the fiscal year of a series, all outstanding
put options as well as certain futures contracts will be treated as if such
positions were closed out at their closing price on such day, with any resulting
gain or loss recognized as 60% long-term and 40% short-term capital gain or
loss. In addition, positions held by a series which consist of at least one debt
security and at least one put option which substantially reduces the risk of
loss of the series with respect to that debt security constitute a "mixed
straddle" which is governed by certain provisions of the Internal Revenue Code
that may cause deferral of losses, adjustments in the holding periods of debt
securities and conversion of short-term capital losses into long-term capital
losses. Each series may consider making certain tax elections applicable to
mixed straddles. In addition, the conversion transaction rules may apply to
recharacterize certain capital gains as ordinary income.
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.
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.
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
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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.
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 or continued 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 capital gains,
whether received in shares or cash, must be reported by each shareholder on his
or her federal income tax return. Shareholders electing to receive distributions
in the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share of
the applicable series of the Fund on the reinvestment date. Distributions of
tax-exempt interest must also be reported. Under federal income tax law, each
series of the Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of shares of such series, except in the case of
certain exempt shareholders. Under the backup withholding provisions of the
Internal Revenue Code, all proceeds from the redemption or exchange of shares
are subject to withholding of federal income tax at the rate of 31% in the case
of nonexempt shareholders who fail to furnish the appropriate series of the Fund
with their taxpayer identification numbers on IRS Form W-9 and with required
certifications regarding their status under the federal income tax law. Such
withholding is also required on taxable dividends and capital gains
distributions unless it is reasonably expected that at least 95% of the
distributions of the series are comprised of tax-exempt dividends. 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.
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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.
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.
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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. Other distributions, including capital gains distributions,
exempt interest dividends derived from obligations of states other than Hawaii
and their political subdivisions, and distributions that are taxable as
dividends for federal income tax purposes are not exempt from Hawaii income tax.
Distributions from the Hawaii Series are not exempt from the Hawaii
Franchise Tax. This tax applies to banks, building and loan associations,
financial services loan companies, financial corporations, and small business
investment companies.
Persons or entities who are not Hawaii residents should generally not be
subject to Hawaiian income taxation on dividends and distributions made by the
Series but may be subject to other state and local taxes.
MARYLAND. In the opinion of Maryland tax counsel, individual shareholders
of the Maryland Series resident in Maryland, corporate shareholders (other than
financial institutions such as banks) of the Maryland Series and shareholders of
the Maryland Series that are trusts or estates will not be subject to Maryland
State or local income taxes on distributions received from the Maryland Series
to the extent that such distributions are attributable to interest on tax-exempt
obligations of the State of Maryland or its political subdivisions and
authorities, or obligations issued by the Governments of Puerto Rico, the Virgin
Islands and Guam, provided that the Maryland Series qualifies as a regulated
investment company and complies with the requirements of the Internal Revenue
Code necessary to pay exempt-interest dividends including the requirement that
at least
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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 (i) "specified private
activity bonds" within the meaning of Section 57(a)(5)(C) of the Internal
Revenue Code and (ii) not issued by the State of Maryland or its political
subdivisions and agencies 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.
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
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<PAGE>
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
investment income (including interest on New York Obligations, described below)
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, each Series will be subject only to nominal New York
State franchise and New York City general corporation taxes of $325 (increased
by the applicable New York State surcharges) and $300, respectively. However,
capital
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gains retained by a Series could be subject to additional 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 such interest is exempt from federal income tax pursuant to
Section 103(a) of the Internal Revenue Code, and 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.
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
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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 qualifying issuers in 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 qualifying issuers in 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
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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 requirement that corporations hold annual meetings of shareholders,
which business trusts are not required to do.
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.
Shares of the Fund entitle their holders to one vote per share. However, on
any matter submitted to a vote of the shareholders, all shares then entitled to
vote will be voted by individual series, unless otherwise required by the
Investment Company Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a series would be
voted upon only by shareholders of the series involved. Additionally, approval
of the investment advisory agreement is a matter to be determined separately by
each series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve the proposal as to those series.
The Fund does not intend to hold annual meetings of shareholders.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any series (which would be
used to distinguish among the rights of different categories of shareholders, as
might be required by future regulations or other unforeseen circumstances) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Fund for shares of any
additional series or class, and all assets in which such consideration is
invested, would belong to that series or class (subject only to the rights of
creditors of such series or class) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to removal upon the action of
two-thirds of the outstanding shares of beneficial interest) and appoint their
own successors, provided that always at least a majority of the Trustees have
been elected by the shareholders of the Fund. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains cash and certain financial and accounting
books and records pursuant to an agreement with the Fund. See "How the Fund is
Managed-- Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus of each series.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent of the Fund. Its
mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005. PMFS is
a wholly-owned subsidiary of PMF. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, in addition to a
new set up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to
B-60
<PAGE>
postage, stationery, printing, allocable communication and other costs. For the
fiscal year ended August 31, 1996, 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............................ $ 35,000
Florida............................................. 40,000
Hawaii Income....................................... 5,500
Maryland............................................ 31,000
Massachusetts....................................... 35,000
Massachusetts Money Market.......................... 25,000
Michigan............................................ 49,000
New Jersey.......................................... 110,000
New Jersey Money Market............................. 87,000
New York............................................ 165,000
New York Money Market............................... 137,000
North Carolina...................................... 37,000
Ohio................................................ 72,000
Pennsylvania........................................ 190,000
</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 that 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 are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that 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 the best 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 that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that 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
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated within the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1 and Baa1.
B-61
<PAGE>
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk. Loans bearing the
designation MIG 1 are of the best quality, enjoying strong protection by
established cash flows, superior liquidity support or demonstrated broad-based
access to the market for refinancing. Loans bearing the designation MIG 2 are of
high quality with margins of protection ample although not so large as in the
preceding group. Loans bearing the designation MIG 3 are of favorable quality,
with all security elements accounted for but lacking the strength of the
preceding grades. Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations having an original maturity not
exceeding one year.
Prime-1: Issuers rated at Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-2: Issuers rated Prime-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 maturing 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: Strong capacity to pay principal and interest. Those issues
determined to possess very strong safety characteristics are given a plus sign
(+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
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: This highest category 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 this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
B-62
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut St. Dev. Auth.,
Conco Proj., Ser. 85, F.R.W.D. P-1 3.40% 9/05/96 $ 1,700 $ 1,700,000
Ind. Dev., Shelton Inn L.P., Ser. 86, F.R.M.D. P-1 4.00 9/03/96 1,000 1,000,000
Lt. & Pwr. Co. Proj., Ser. 93B, F.R.W.D. VMIG1 3.50 9/04/96 3,200 3,200,000
Poll. Ctrl. Rev., Conn Lt. & Pwr. Co., Proj. A, Ser.
96A, F.R.W.D. P-1 3.50 9/05/96 2,200 2,200,000
Poll. Ctrl. Rev., W. Mass. Elec. Co., Ser. 93A, F.R.W.D. VMIG1 3.45 9/04/96 3,200 3,200,000
Rand Whitney Container Bd., Ser. 93, F.R.W.D. P-1 3.20 9/04/96 2,500 2,500,000
SHW Inc. Proj., Ser. 90, F.R.W.D. NR 3.55 9/04/96 3,600 3,600,000
Connecticut St. Hlth. & Edl. Facs. Auth. Rev.,
Charlotte-Hungerford, Ser. B, F.R.W.D. VMIG1 3.30 9/05/96 1,600 1,600,000
Pomfret School Issue, Ser. A, F.R.W.D. VMIG1 3.15 9/04/96 1,000 1,000,000
Yale Univ., Ser. L, T.E.C.P. VMIG1 3.40 9/05/96 1,100 1,100,000
Yale Univ., Ser. N, T.E.C.P. VMIG1 3.40 9/05/96 1,500 1,500,000
Connecticut St. Hsg. Fin. Auth. Prog., Ser. A-4, A.M.T. VMIG1 3.65 4/10/97 2,200 2,200,000
Connecticut St. Mun. Elec. Engy., Pwr. Supply Sys. Rev.,
Ser. 95A, T.E.C.P. P-1 3.45 10/16/96 1,600 1,600,000
Connecticut St. Spec. Assmt., Unemployment Comp., Ser. 93C,
A.M.T. VMIG1 3.90 7/01/97 5,000 5,000,000
Connecticut St. Spec. Tax Oblig., Trans. Infrastructure
Rev., Ser. 90I, F.R.W.D. VMIG1 3.35 9/04/96 5,145 5,145,000
Decatur Alabama Indl. Dev. Brd. Solid Waste Disp. Rev.,
Ser. 95, F.R.D.D. P-1 3.95 9/03/96 600 600,000
East Hartford Connecticut, B.A.N. NR 3.75 1/27/97 2,000 2,003,123
Fairfield Connecticut, B.A.N. NR 3.75 1/15/97 1,680 1,682,110
Gulf Coast Indl. Dev. Auth., Texas, Solid Waste Disp. Rev.,
Citgo Petroleum Corp. Proj., Ser. 95, F.R.D.D. VMIG1 4.00 9/03/96 2,400 2,400,000
Hartford Connecticut Redev. Agcy. MultiFamily Mtge.,
Underwood Twrs. Proj., Ser. 90, F.R.W.D. A1+(d) 3.45 9/05/96 2,800 2,800,000
Litchfield Connecticut, B.A.N. NR 4.00 10/24/96 943 943,341
Mashantucket Western Connecticut,
Ser. 96, T.E.C.P. P-1 3.55 10/03/96 3,000 3,000,000
Ser. 96, T.E.C.P. P-1 3.60 11/07/96 2,700 2,700,000
Puerto Rico Comnwlth. Hwy. & Trans. Auth. Rev., Ser. 85,
F.R.W.D. VMIG1 3.10 9/04/96 200 200,000
Puerto Rico Elec. Pwr. Auth. Rev., Ser. K Aaa 9.25 7/01/97 1,000(e) 1,063,333
Puerto Rico Hsg. Fin. Corp., MultiFamily Mtge. Rev.,
Portfolio A, Ser. 90I, M.O.T. Aa 3.55 9/15/96 2,455 2,455,000
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fac. Fin.
Auth. Rev., Ser. 83A, A.O.T. NR 3.80 12/01/96 2,500 2,500,000
Puerto Rico Public Bldgs. Auth. Rev., Ser. SG34, F.R.W.D. A1+(d) 3.40 9/05/96 3,000 3,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-63
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
St. Charles Parish Louisiana, Poll. Ctrl. Rev., Shell Oil
Co. Norco Proj., Ser. 91, F.R.D.D. VMIG1 3.95% 9/03/96 $ 1,600 $ 1,600,000
Stamford Connecticut Hsg. Auth. Rev., Morgan Street Proj.,
Ser. 94, F.R.W.D. VMIG1 3.35 9/04/96 1,500 1,500,000
Washington St. Hsg. Fin. Commission, Ser. 91, F.R.D.D. VMIG1 3.95 9/03/96 1,300 1,300,000
Windham Connecticut, General Obligation, B.A.N. NR 3.50 12/17/96 3,200 3,201,903
-----------
Total Investments--89.5%
(amortized cost--$69,493,810 (c)) 69,493,810
Other assets in excess of liabilities--10.5% 8,188,783
-----------
Net Assets--100% $77,682,593
-----------
-----------
</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.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.
(d) Standard & Poor's rating.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-64
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1996
<S> <C>
Investments, at amortized cost which approximates market value............................................. $ 69,493,810
Cash....................................................................................................... 2,787,038
Receivable for Series shares sold.......................................................................... 5,284,943
Receivable for investments sold............................................................................ 3,000,000
Interest receivable........................................................................................ 530,012
Deferred expenses and other assets......................................................................... 2,207
---------------
Total assets............................................................................................ 81,098,010
---------------
Liabilities
Payable for investments purchased.......................................................................... 2,700,000
Payable for Series shares reacquired....................................................................... 607,131
Accrued expenses and other liabilities..................................................................... 43,696
Dividends payable.......................................................................................... 36,096
Distribution fee payable................................................................................... 18,116
Management fee payable..................................................................................... 7,678
Deferred trustee's fees.................................................................................... 2,700
---------------
Total liabilities....................................................................................... 3,415,417
---------------
Net Assets................................................................................................. $ 77,682,593
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value........................................................ $ 776,826
Paid-in capital in excess of par........................................................................ 76,905,767
---------------
Net assets, August 31, 1996................................................................................ $ 77,682,593
---------------
---------------
Net asset value, offering price and redemption price per share ($77,682,593 / 77,682,593 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, 1996
<S> <C>
Income
Interest and discount earned............... $ 2,669,092
---------------
Expenses
Management fee............................. 372,880
Distribution fee........................... 93,220
Custodian's fees and expenses.............. 44,000
Transfer agent's fees and expenses......... 35,000
Registration fees.......................... 26,000
Reports to shareholders.................... 23,000
Amortization of organization expense....... 13,790
Audit fee and expenses..................... 11,100
Legal fees and expenses.................... 5,000
Trustees' fees............................. 4,600
Miscellaneous.............................. 2,576
---------------
Total expenses.......................... 631,166
Less: Management fee waiver (Note 2).......... (279,660)
Custodian fee credit...................... (8,450)
---------------
Net expenses............................ 343,056
---------------
Net investment income......................... 2,326,036
Realized Loss on Investments
Net realized loss on investments.............. (911)
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,325,125
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income........ $ 2,326,036 $ 1,812,631
Net realized gain (loss) on
investment transactions... (911) 714
------------ ------------
Net increase in net assets
resulting from
operations................ 2,325,125 1,813,345
------------ ------------
Dividends and distributions to
shareholders................. (2,325,125) (1,813,345)
------------ ------------
Series share transactions (at $1
per share)
Net proceeds from shares
sold...................... 288,309,868 234,075,262
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions......... 2,252,473 1,751,916
Cost of shares reacquired.... (275,746,533) (227,262,566)
------------ ------------
Net increase in net assets
from Series share
transactions.............. 14,815,808 8,564,612
------------ ------------
Total increase.................. 14,815,808 8,564,612
Net Assets
Beginning of year............... 62,866,785 54,302,173
------------ ------------
End of year..................... $ 77,682,593 $ 62,866,785
------------ ------------
------------ ------------
</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
fourteen 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 Net 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. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
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 $52,600 in organization and
initial registration expenses. Such amount was deferred and amortized over a
period of 60 months ended 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 LLC
(``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, 1996, PMF voluntarily waived 75% of its management fee.
The amount of fees waived for the fiscal year ended August 31, 1996 amounted to
$279,660 ($.004 per share; .375% of average net assets).
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Fund through January 1,
1996. Effective January 2, 1996, Prudential Securities Incorporated (``PSI'')
became the distributor of the Fund and is serving the Fund under the same terms
and conditions as under the arrangement with PMFD. The Series reimbursed PMFD
and PSI for distributing and servicing the Series' shares pursuant to the plan
of distribution at an annual rate of .125 of 1% of the Series' average daily net
assets. The distribution fee is accrued daily and payable monthly.
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 subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1996,
the Series incurred fees of approximately $31,300 for the services of PMFS. As
of August 31, 1996, 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.
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights (Unaudited) CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and realized
gains(a)........................... .03 .03 .02 .02 .03
Dividends and distributions to
shareholders....................... (.03) (.03) (.02) (.02) (.03)
------- ------- ------- ------- -------
Net asset value, end of year......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):..................... 3.17% 3.16% 2.02% 2.20% 3.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $77,683 $62,867 $54,302 $57,794 $40,480
Average net assets (000)............. $74,576 $57,103 $60,594 $53,152 $33,964
Ratios to average net assets(a):
Expenses, including distribution
fee................................ .47% .58% .54% .39% .13%
Expenses, excluding distribution
fee.............................. .35% .46% .42% .26% .00%
Net investment income.............. 3.12% 3.17% 1.99% 2.17% 3.20%
</TABLE>
- ---------------
(a) Net of management fee waiver and/or expense subsidy.
(b) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-68
<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, 1996, 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1996
B-69
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--98.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Alachua Cnty. Hlth. Facs. Auth.,
Santa Fe Healthcare Facs. Proj. AAA(c) 7.60% 11/15/13 $ 1,750 (e) $ 1,973,930
Shands Teaching Hosp. & Clinics, Ser. A, M.B.I.A. Aaa 5.80 12/01/26 2,000 1,933,440
Alachua Cnty. Ind. Dev. Auth. Rev., HB Fuller Co. Proj. NR 7.75 11/01/16 3,000 3,119,070
Brevard Cnty. Edl. Facs. Auth. Rev., Florida Inst. of
Tech. BBB(c) 6.875 11/01/22 1,500 1,536,945
Brevard Cnty. Sch. Brd. Ctfs. of Part., Ser. A,
A.M.B.A.C. Aaa 6.50 7/01/12 3,500 (e) 3,871,420
Broward Cnty. Edl. Facs. Auth. Rev., Nova Univ. Dorm.
Proj., Ser. A NR 7.50 4/01/17 1,500 (e) 1,691,580
Broward Cnty. Hlth. Facs. Auth., North Beach Hosp.,
M.B.I.A. Aaa 6.75 8/15/06 1,000 1,095,800
City of Miami Beach, Wtr. & Swr. Rev., F.S.A. Aaa 5.375 9/01/15 2,000 1,898,480
Clay Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge., Ser.
A, G.N.M.A. Aaa 7.45 9/01/23 375 391,635
Coral Springs Impvt. Dist., Wtr. & Swr. Rfdg., M.B.I.A. Aaa 6.00 6/01/10 1,000 1,056,620
Dade Cnty.,
Pub. Impvt. J & K Seaport, M.B.I.A. Aaa 6.50 10/01/07 1,220 1,357,738
Pub. Impvt. J & K Seaport, M.B.I.A. Aaa 6.50 10/01/10 1,555 1,720,499
Dade Cnty. Aviation Dept. Rev.,
Ser. B, M.B.I.A. Aaa 6.00 10/01/24 1,500 1,483,830
Ser. E, A.M.B.A.C. Aaa 5.50 10/01/10 1,000 993,180
Dade Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp. of
Miami Proj.,
Ser. A, E.T.M., M.B.I.A. Aaa 6.75 5/01/08 500 540,260
Dade Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. B, G.N.M.A Aaa 7.25 9/01/23 360 373,172
Sngl. Fam. Mtge., Ser. C, G.N.M.A. Aaa 7.75 9/01/22 820 862,394
Dade Cnty. Pub. Facs. Ref., Jackson Mem. Hosp., Ser. A,
M.B.I.A. Aaa 4.875 6/01/15 3,000 2,638,230
Dade Cnty. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 6.00 7/15/06 3,500 3,736,180
Dade Cnty. Spl. Oblig., Metro Dade Fire & Rescue Svc.,
F.G.I.C. Aaa 6.00 4/01/05 2,800 2,977,324
Duval Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge.,
G.N.M.A. AAA(c) 8.375 12/01/14 515 543,109
Enterprise Cmnty. Dev. Dist., Osceola Co. Spl. Assmnt.,
M.B.I.A. Aaa 6.00 5/01/10 2,320 2,390,876
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Inc., Ser. A BBB+(c) 8.70 10/01/14 1,830 1,990,601
Escambia Cnty. Poll. Ctrl. Rev., Champion Int'l. Corp.
Proj. Baa1 6.90 8/01/22 3,500 3,628,625
Escambia Cnty. Sch. Brd. Cert., M.B.I.A. Aaa 5.50 2/01/22 2,000 1,887,700
Florida St. Brd. of Ed. Cap. Outlay,
Ser. A, F.G.I.C. Aaa 5.00 1/01/15 1,000 909,290
Ref. Pub. Ed., Ser. D Aa 4.75 6/01/22 4,985 4,172,595
Florida St. Mun. Pwr. Agcy. Ref., Stanton II Proj.,
A.M.B.A.C. Aaa 4.50 10/01/27 2,500 1,971,450
Gainesville Utils. Sys. Rev., Ser. A Aa 5.20 10/01/22 2,500 2,271,425
Hillsborough Cnty.,
Cnty. Ctr. Proj., M.B.I.A. Aaa 5.00 7/01/15 1,560 1,413,017
Ref. Cnty. Ctr. Proj., M.B.I.A. Aaa 6.00 7/01/06 1,605 1,712,952
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-70
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Hillsborough Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev.,
Tampa Elec. Proj., Ser. 92 Aa3 8.00% 5/01/22 $ 1,750 $ 2,019,010
Indian Rvr. Cnty., Wtr. & Swr. Rev., F.G.I.C. Aaa 5.50 9/01/26 3,280 3,109,702
Jacksonville Elec. Auth. Rev., St. Johns Rvr. Pwr. Park
Issue 2 Aa1 Zero 10/01/10 3,000 1,359,240
Jacksonville Hlth. Facs. Auth. Hosp. Rev.,
Nat'l. Ben. Assoc. Baa1 7.00 12/01/22 1,825 1,857,047
St. Lukes Hosp. Assoc. Proj. AA+(c) 7.125 11/15/20 1,000 1,082,010
Jacksonville Wtr. & Swr. Dev. Rev., Suburban Utils. A3 6.75 6/01/22 1,000 1,046,720
Jacksonville Wtr. & Swr. Rev., United Wtr. Proj.,
A.M.B.A.C. Aaa 6.35 8/01/25 1,500 1,552,455
Lake Cnty. Res. Rec., Ind. Dev. Rev., Ser. A Baa 5.95 10/01/13 1,035 989,543
Leon Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. A., G.N.M.A. Aaa 7.30 4/01/21 405 419,693
Martin Cnty. Ind. Dev. Auth. Rev., Indiantown Cogen
Proj. Baa3 7.875 12/15/25 1,200 1,341,588
Martin Cnty. Ref., A.M.B.A.C. Aaa 4.50 2/01/09 1,575 1,405,750
Miami Hlth. Facs. Auth. Rev., Mercy Hosp. A 8.125 8/01/11 1,000 1,072,360
Miami Spec. Oblig.,
Admn. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/16 1,500 1,517,880
Admn. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/25 500 504,355
Miramar Wstwtr. Impvt. Assmt., F.G.I.C. Aaa 6.75 10/01/16 2,500 2,743,475
Okaloosa Cnty. Cap. Impvt. Rev., M.B.I.A. Aaa Zero 12/01/06 450 261,891
Orange Cnty. Hlth. Facs. Auth. Rev., Adventist Hlth.
Sys., A.M.B.A.C. Aaa 5.25 11/15/20 1,000 914,300
Orange Cnty. Hsg. Fin. Auth. Mtge. Rev., Ser. A,
G.N.M.A. AAA(c) 7.375 9/01/24 420 438,262
Orange Cnty. Hsg. Fin. Rev. Auth.,
MultiFam. Ashley Point Apts. BBB+(c) 6.85 10/01/16 1,200 1,224,360
MultiFam. Ashley Point Apts. BBB+(c) 7.10 10/01/24 855 873,502
Orlando Utils. Commn., Wtr. & Elec., Ser. D Aa 6.75 10/01/17 2,200 2,481,226
Palm Beach Cnty. Hlth. Facs. Auth. Rev., Good Samaritan
Hlth. Sys. A+(c) 6.30 10/01/22 1,000 1,014,420
Pensacola Hlth. Facs. Auth., Daughters of Charity,
M.B.I.A. Aaa 5.25 1/01/11 1,600 1,529,984
Puerto Rico Comnwlth.,
Gen. Oblig. Baa1 6.45 7/01/17 1,400 1,472,702
Gen. Oblig. Baa1 6.50 7/01/23 2,650 2,793,391
Gen. Oblig., F.S.A. Aaa 7.958(d) 7/01/20 3,000 2,928,750
Pub. Impvt., M.B.I.A. Aaa 5.375 7/01/22 2,000 1,886,740
Puerto Rico Elec. Pwr. Auth. Rev.,
Ser. R Baa1 6.25 7/01/17 5,000 5,058,050
Pwr. Rev. Bds. Baa1 5.50 7/01/20 1,665 1,536,262
Ser. X Baa1 5.50 7/01/25 3,000 2,787,450
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-71
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Ind. Tour. Edl. Hosp. Auxil., Mut. Oblig.
Grp. Proj., M.B.I.A. Aaa 6.25% 7/01/24 $ 2,635 $ 2,728,042
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 7.116(d) 1/16/15 2,250 2,075,625
Sarasota Wtr. & Swr. Util. Ref., Ser. C, F.G.I.C. Aaa 4.50 10/01/16 1,000 833,370
St. Petersburg Hlth. Facs. Auth. Rev., Allegheny Hlth.
Proj., M.B.I.A. Aaa 7.00 12/01/15 1,000 1,099,400
Tampa Gtd. Entitlement Rev., A.M.B.A.C. Aaa 7.05 10/01/07 2,000 2,215,040
Tampa Sports Auth. Rev., M.B.I.A. Aaa 5.75 10/01/20 1,000 999,940
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser.
91 NR 7.75 10/01/06 1,265 1,334,196
Volusia Cnty. Edl. Fac. Auth. Rev., Embry Riddle Univ. AAA(c) 6.625 10/15/22 1,000 1,064,750
Volusia Cnty. Hlth. Facs. Auth. Rev., Mem. Hlth. Sys.
Proj. BBB+(c) 8.25 6/01/20 2,000 (e) 2,269,120
------------
Total long-term investments (cost $119,913,169) 121,984,968
------------
SHORT-TERM INVESTMENTS--1.0%
Puerto Rico Comnwlth., Gov't. Dev. Bk., Ser. 85,
F.R.W.D. VMIG1 3.10 9/04/96 100 100,000
St. Lucie Cnty. Solid Wst. Disp. Rev., F.R.D.D. VMIG1 4.00 9/03/96 1,100 1,100,000
------------
Total short-term investments (cost $1,200,000) 1,200,000
------------
Total Investments--99.0%
(cost $121,113,169; Note 4) 123,184,968
Other assets in excess of liabilities--1.0% 1,304,622
------------
Net Assets--100% $124,489,590
------------
------------
</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 Company.
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.
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 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 period end.
(e) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-72
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1996
Investments, at value (cost $121,113,169)................................................................. $ 123,184,968
Cash...................................................................................................... 14,389
Interest receivable....................................................................................... 2,026,228
Receivable for Series shares sold......................................................................... 89,334
Receivable for investments sold........................................................................... 65,314
Prepaid expenses and other assets......................................................................... 3,838
---------------
Total assets........................................................................................... 125,384,071
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 671,760
Dividends payable......................................................................................... 108,186
Accrued expenses and other liabilities.................................................................... 59,392
Management fee payable.................................................................................... 32,347
Distribution fee payable.................................................................................. 20,096
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 894,481
---------------
Net Assets................................................................................................ $ 124,489,590
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 123,092
Paid-in capital in excess of par....................................................................... 123,691,631
---------------
123,814,723
Accumulated net realized loss on investments........................................................... (1,396,932)
Net unrealized appreciation on investments............................................................. 2,071,799
---------------
Net assets, August 31, 1996............................................................................... $ 124,489,590
---------------
---------------
Class A:
Net asset value and redemption price per share
($101,998,936 / 10,085,572 shares of beneficial interest issued and outstanding).................... $10.11
Maximum sales charge (3% of offering price)............................................................ .31
---------------
Maximum offering price to public....................................................................... $10.42
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($14,698,364 / 1,453,225 shares of beneficial interest issued and outstanding)...................... $10.11
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($7,792,290 / 770,359 shares of beneficial interest issued and outstanding)......................... $10.11
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-73
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................. $ 7,900,417
---------------
Expenses
Management fee........................... 665,643
Distribution fee--Class A................ 112,266
Distribution fee--Class B................ 62,850
Distribution fee--Class C................ 62,195
Custodian's fees and expenses............ 59,000
Reports to shareholders.................. 42,000
Transfer agent's fees and expenses....... 40,000
Registration fees........................ 32,000
Audit fee and expenses................... 12,300
Legal fees and expenses.................. 10,000
Trustees' fees........................... 3,900
Miscellaneous............................ 5,980
---------------
Total expenses........................ 1,108,134
Less: Management fee waiver.............. (417,808)
Expense subsidy (Note 4).............. (86,788)
Custodian fee credit.................. (2,769)
---------------
Net expenses.......................... 600,769
---------------
Net investment income....................... 7,299,648
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.................. 3,128,437
Financial futures contract
transactions.......................... 252,913
Written option transactions.............. 40,511
---------------
3,421,861
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (2,691,837)
Financial futures contracts.............. 46,875
---------------
(2,644,962)
---------------
Net gain on investments..................... 776,899
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 8,076,547
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income....... $ 7,299,648 $ 8,313,464
Net realized gain (loss) on
investment
transactions............. 3,421,861 (4,155,474)
Net change in unrealized
appreciation
(depreciation) of
investments.............. (2,644,962) 6,025,242
--------------- ------------
Net increase in net assets
resulting from
operations............... 8,076,547 10,183,232
--------------- ------------
Dividends from net
investment income (Note
1)
Class A.................. (6,244,938) (7,502,100)
Class B.................. (647,226) (262,158)
Class C.................. (407,484) (549,206)
--------------- ------------
(7,299,648) (8,313,464)
--------------- ------------
Series share transactions (net
of share conversions) (Note
6)
Net proceeds from shares
sold..................... 15,332,603 26,011,068
Net asset value of shares
issued in reinvestment of
dividends................ 3,085,406 3,653,143
Cost of shares reacquired... (33,022,261) (39,832,414)
--------------- ------------
Net decrease in net assets
from Series share
transactions............. (14,604,252) (10,168,203)
--------------- ------------
Total decrease................. (13,827,353) (8,298,435)
Net Assets
Beginning of year.............. 138,316,943 146,615,378
--------------- ------------
End of year.................... $ 124,489,590 $138,316,943
--------------- ------------
--------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-74
<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
fourteen 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-75
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
Securities Transactions and Net 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 accretes original issue
discount on portfolio securities as adjustments to interest income. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
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 amortized
over a period of 60 months ended December 1995.
Custody Fee Credits: The Fund 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 LLC.
(``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 seven
months ended March 31, 1996, PMF waived 70% of its management fee. For the three
months ended June 30, 1996, PMF waived 60% of its management fee. For the two
months ended August 31, 1996, PMF waived 40% of its management fee. The amount
of fees waived during the year ended August 31, 1996 amounted to $417,808 ($.03
per share for Class A, B and C shares; .31% of average net assets). The Series
is not required to reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI'')
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B and Class
C shares of the Fund. The Fund compensates PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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. Such expenses under the Class A, B and C Plans were
.10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets,
respectively, for the year ended August 31, 1996.
PMFD and PSI have advised the Series that they have received approximately
$101,700 in front-end sales charges resulting from sales of Class A shares
during the year ended August 31, 1996. From these fees, PMFD and PSI paid such
sales charges to 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, 1996, it
received approximately $62,100 and $300 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
- --------------------------------------------------------------------------------
B-76
<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, 1996,
the Series incurred fees of approximately $37,600 for the services of PMFS. As
of August 31, 1996, approximately $2,900 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. 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 January 1, 1996. For the four months ended December 31, 1995, PMF
subsidized $86,788 ($.007 per share for Class A, B and C shares; .19% 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, 1996 were $88,764,398 and $96,774,426,
respectively.
The federal income tax basis of the Series' investments at August 31, 1996 was
$121,114,419 and, accordingly, net unrealized appreciation was $2,070,549 (gross
unrealized appreciation--$4,205,684; gross unrealized depreciation--$2,135,135).
Transactions in written options during the year ended August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written 180 $ 40,511
Options expired (180) (40,511)
--------- --------
Options outstanding at August 31,
1996 0 $ 0
--------- --------
--------- --------
</TABLE>
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1996 of approximately $1,463,000 which expires in 2003. Such
carryforward is after utilization of approximately $1,263,000 of net taxable
gains realized and recognized during the year ended August 31, 1996.
Accordingly, no capital gains distribution is expected to be paid until net
gains have been realized in excess of the carryforward.
- ------------------------------------------------------------
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. A
special exchange privilege is also available for shareholders who qualify 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 512,938 $ 5,271,777
Shares issued in reinvestment of
dividends......................... 251,003 2,571,304
Shares reacquired................... (2,770,938) (28,334,987)
---------- ------------
Net decrease in shares outstanding
before conversion................. (2,006,997) (20,491,906)
Shares issued upon conversion from
Class B........................... 66,824 684,012
---------- ------------
Net decrease in shares
outstanding....................... (1,940,173) $(19,807,894)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-77
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
Year ended August 31, 1996:
<S> <C> <C>
Shares sold......................... 895,444 $ 9,260,865
Shares issued in reinvestment of
dividends......................... 27,459 281,193
Shares reacquired................... (230,552) (2,340,629)
---------- ------------
Net increase in shares outstanding
before conversion................. 692,351 7,201,429
Shares reacquired upon conversion
into Class A...................... (66,824) (684,012)
---------- ------------
Net increase in shares
outstanding....................... 625,527 $ 6,517,417
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<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
---------- ------------
---------- ------------
Class C
- ------------------------------------
Year ended August 31, 1996:
Shares sold......................... 76,922 $ 799,961
Shares issued in reinvestment of
dividends......................... 22,738 232,909
Shares reacquired................... (226,860) (2,346,645)
---------- ------------
Net decrease in shares
outstanding....................... (127,200) $ (1,313,775)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-78
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.06 $ 9.91 $ 10.87 $ 10.27 $ 9.76
-------- -------- -------- -------- --------
Income from investment operations
Net investment income(a)............................ .57 .59 .59 .57 .65
Net realized and unrealized gain (loss) on
investment transactions.......................... .05 .15 (.76) .73 .51
-------- -------- -------- -------- --------
Total from investment operations................. .62 .74 (.17) 1.30 1.16
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.57) (.59) (.59) (.57) (.65)
Distributions from net realized gains............... -- -- (.20) (.13) --
-------- -------- -------- -------- --------
Total distributions.............................. (.57) (.59) (.79) (.70) (.65)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 10.11 $ 10.06 $ 9.91 $ 10.87 $ 10.27
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.................................... 6.20% 7.85% (1.69)% 13.78% 12.26%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $101,999 $120,963 $134,849 $148,900 $104,335
Average net assets (000)............................ $112,266 $124,259 $146,489 $123,820 $ 82,893
Ratios to average net assets(a):
Expenses, including distribution fees............ .37% .24% .20% .20% .09%
Expenses, excluding distribution fees............ .27% .17% .20% .20% .09%
Net investment income............................ 5.56% 6.04% 5.67% 5.94% 6.41%
For Class A, B and C shares:
Portfolio turnover rate.......................... 68% 65% 75% 68% 56%
</TABLE>
- ---------------
(a) Net of expense subsidy and 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-79
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
----------------------------------------- ------------------------
August 1,
1994(c)
Year Ended August 31, through Year Ended August 31,
-------------------------- August 31, ------------------------
1996 1995 1994 1996 1995
---------- ----------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.06 $ 9.91 $ 9.95 $ 10.06 $ 9.91
---------- ----- ----- ------ --------
Income from investment operations
Net investment income(a)............................ .53 .55 .04 .50 .53
Net realized and unrealized gain (loss) on
investment transactions.......................... .05 .15 (.04) .05 .15
---------- ----- ----- ------ --------
Total from investment operations................. .58 .70 -- .55 .68
---------- ----- ----- ------ --------
Less distributions
Dividends from net investment income................ (.53) (.55) (.04) (.50) (.53)
Distributions from net realized gains............... -- -- -- -- --
---------- ----- ----- ------ --------
Total distributions.............................. (.53) (.55) (.04) (.50) (.53)
---------- ----- ----- ------ --------
Net asset value, end of period...................... $ 10.11 $ 10.06 $ 9.91 $ 10.11 $ 10.06
---------- ----- ----- ------ --------
---------- ----- ----- ------ --------
TOTAL RETURN(b):.................................... 5.79% 7.39% (0.05)% 5.52% 7.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $14,699 $8,326 $582 $7,792 $9,028
Average net assets (000)............................ $12,570 $4,699 $118 $8,293 $10,265
Ratios to average net assets(a):
Expenses, including distribution fees............ .77% .67% .70%(d) 1.02% .92%
Expenses, excluding distribution fees............ .27% .17% .20%(d) .27% .17%
Net investment income............................ 5.16% 5.56% 6.21%(d) 4.91% 5.35%
<CAPTION>
<S> <C> <C>
July 26,
1993(e)
through
August 31,
1994 1993
---------- ----------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.87 $10.58
---------- -------
Income from investment operations
Net investment income(a)............................ .48 .03
Net realized and unrealized gain (loss) on
investment transactions.......................... (.76) .29
---------- -------
Total from investment operations................. (.28) .32
---------- -------
Less distributions
Dividends from net investment income................ (.48) (.03)
Distributions from net realized gains............... (.20) --
---------- -------
Total distributions.............................. (.68) (.03)
---------- -------
Net asset value, end of period...................... $ 9.91 $10.87
---------- -------
---------- -------
TOTAL RETURN(b):.................................... (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $11,185 $3,132
Average net assets (000)............................ $ 9,280 $1,038
Ratios to average net assets(a):
Expenses, including distribution fees............ .95% .95%(d)
Expenses, excluding distribution fees............ .20% .20%(d)
Net investment income............................ 4.99% 5.19%(d)
</TABLE>
- ---------------
(a) Net of expense subsidy and 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) Commencement of offering of Class B shares.
(d) Annualized.
(e) Commencement of offering of Class C shares. Prior to August 1, 1994, Class C
shares were called Class D shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-80
<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, 1996, 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, 1996 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, 1996, 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 14, 1996
B-81
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--96.3%
- ---------------------------------------------------------------------------------------------------------------------------------
Guam Gov't., Gen. Oblig., Ser. A BBB(c) 5.90% 9/01/05 $ 500 $ 496,560
Guam Pwr. Auth. Rev.,
Ser. A BBB(c) 6.625 10/01/14 250 255,045
Ser. A BBB(c) 6.75 10/01/24 525 537,679
Hawaii St. Arpt. Sys. Rev., 2nd Ser. A 7.00 7/01/18 365 387,626
Hawaii St. Arpt. Sys. Rev., 2nd Ser. 90, F.G.I.C. Aaa 7.50 7/01/20 500 546,595
Hawaii St. Dept. Budget & Fin.,
Hawaiian Elec. Co., Ser. C, M.B.I.A. Aaa 7.375 12/01/20 500 547,190
Kapiolani Hlth. Care Sys. A 6.30 7/01/08 500 515,650
Kapiolani Hosp. A 6.00 7/01/11 250 250,185
Queens Med. Ctr. Aa 5.80 7/01/10 500 501,655
Queens Med. Ctr. Proj., F.G.I.C. Aaa 5.90 7/01/07 230 (d) 245,971
Hawaii St. Gen. Oblig., Ser. CJ Aa 6.25 1/01/15 650 671,222
Hawaii St. Harbor Cap. Impvt. Rev.,
F.G.I.C. Aaa 6.25 7/01/10 250 (e) 260,030
F.G.I.C. Aaa 6.25 7/01/15 500 511,745
Hawaii St. Hsg. Fin. & Dev. Corp. Rev.,
Affordable Rental Proj., Ser. A A1 6.05 7/01/22 725 710,094
Sngl. Fam. Mtge. Rev., Ser. B, F.N.M.A. Aa 5.85 7/01/17 500 494,615
Univ. of Hawaii Fac. Hsg. Proj., A.M.B.A.C. Aaa 5.65 10/01/16 500 487,670
Honolulu City & Cnty.,
Ref. & Impvt., Ser. B, F.G.I.C. Aaa 5.50 10/01/11 900 899,037
Water Sys. Rev. Aa 5.80 7/01/16 500 497,040
Maui Cnty., Ser. A, M.B.I.A. Aaa 5.65 6/01/10 570 573,352
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.45 7/01/17 500 525,965
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O Baa1 5.00 7/01/12 600 538,032
Puerto Rico Hwy. & Trans. Auth. Rev., Ser. V Baa1 6.375 7/01/08 500 526,240
Puerto Rico Ind., Tourist, Ed., Med. & Env. Ctrl. Facs.,
Doctor Pila Hosp. Proj., F.H.A. AAA(c) 6.125 8/01/25 500 508,635
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/16 500 522,800
Hosp. Auxilio Mutuo Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/24 250 258,827
Puerto Rico Mun. Fin. Agcy., Ser. A, F.S.A. Aaa 6.00 7/01/14 250 253,498
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 5.449 1/16/15 1,000 961,670
Puerto Rico Univ. Sys. Rev., Ser. M, M.B.I.A. Aaa 5.25 6/01/25 750 692,550
Virgin Islands Pub. Fin. Auth. Rev.,
Gov't. Dev. Proj., Ser. B BBB-(c) 7.375 10/01/10 300 323,319
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 250 265,335
-----------
Total long-term investments (cost $14,327,900) 14,765,832
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-82
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.9%
Puerto Rico Comnwlth., Gov't Dev. Bank., Ser. 85, F.R.W.D.
(cost $300,000) VMIG1 3.10% 9/04/96 $ 300 $ 300,000
-----------
Total Investments--98.2%
(cost $14,627,900; Note 5) 15,065,832
Other assets in excess of liabilities--1.8% 269,107
-----------
Net Assets--100% $15,334,939
-----------
-----------
</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 (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 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) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations.
(e) 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-83
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1996
Investments, at value (cost $14,627,900).................................................................. $ 15,065,832
Cash...................................................................................................... 40,121
Interest receivable....................................................................................... 203,652
Deferred expenses and other assets........................................................................ 64,310
Due from Manager.......................................................................................... 41,472
Receivable for Series shares sold......................................................................... 31,814
Due from broker-variation margin.......................................................................... 4,938
---------------
Total assets........................................................................................... 15,452,139
---------------
Liabilities
Accrued expenses.......................................................................................... 76,933
Payable for Series shares reacquired...................................................................... 19,590
Dividends payable......................................................................................... 13,441
Distribution fee payable.................................................................................. 5,536
Deferred trustees' fees................................................................................... 1,700
---------------
Total liabilities...................................................................................... 117,200
---------------
Net Assets................................................................................................ $ 15,334,939
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 12,775
Paid-in capital in excess of par....................................................................... 14,911,740
---------------
14,924,515
Accumulated net realized loss on investments........................................................... (36,759 )
Net unrealized appreciation on investments............................................................. 447,183
---------------
Net assets, August 31, 1996............................................................................... $ 15,334,939
---------------
---------------
Class A:
Net asset value and redemption price per share
($3,800,184 / 316,580 shares of beneficial interest issued and outstanding)......................... $12.00
Maximum sales charge (3% of offering price)............................................................ .37
Maximum offering price to public....................................................................... $12.37
Class B:
Net asset value, offering price and redemption price per share
($10,126,267 / 843,579 shares of beneficial interest issued and outstanding)........................ $12.00
Class C:
Net asset value, offer price and redemption price per share
($1,408,488 / 117,335 shares of beneficial interest issued and outstanding)......................... $12.00
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-84
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
HAWAII INCOME SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Year Ended
<CAPTION>
August 31,
Net Investment Income 1996
---------------
<S> <C>
Income
Interest................................... $ 835,223
---------------
Expenses
Management fee............................. 71,610
Distribution fee--Class A.................. 3,620
Distribution fee--Class B.................. 47,993
Distribution fee--Class C.................. 8,274
Custodian's fees and expenses.............. 64,000
Reports to shareholders.................... 41,000
Registration fees.......................... 36,000
Amortization of organization expense....... 20,976
Audit fee expenses......................... 12,300
Legal fees and expenses.................... 10,000
Transfer agent's fees and expenses......... 5,500
Trustees' fees and expenses................ 3,900
Miscellaneous.............................. 4,411
---------------
Total expenses.......................... 329,584
Less: Management fee waiver................ (7,161)
Expense subsidy........................ (212,409)
---------------
Net expenses............................ 110,014
---------------
Net investment income......................... 725,209
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 57,939
Financial futures contract transactions.... (101,589)
---------------
(43,650)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments................................ (57,716)
Financial futures contracts................ 23,782
---------------
(33,934)
---------------
Net loss on investments....................... (77,584)
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 647,625
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
HAWAII INCOME SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
September
19,
1994*
Year Ended through
Increase (Decrease) August 31, August 31,
in Net Assets 1996 1995
------------ ------------
<S> <C> <C>
Operations
Net investment income.......... $ 725,209 $ 457,043
Net realized gain (loss) on
investment transactions..... (43,650) 94,967
Net change in unrealized
appreciation (depreciation)
of investments.............. (33,934) 481,117
------------ ------------
Net increase in net assets
resulting from operations... 647,625 1,033,127
------------ ------------
Dividends and Distributions (Note
1):
Dividends from net investment
income
Class A..................... (194,875) (140,503)
Class B..................... (478,063) (299,569)
Class C..................... (52,271) (16,971)
------------ ------------
(725,209) (457,043)
------------ ------------
Distributions from net realized
gains
Class A..................... (22,739) --
Class B..................... (58,916) --
Class C..................... (6,421) --
------------ ------------
(88,076) --
------------ ------------
Series share transactions (net of
share conversions) (Note 6):
Net proceeds from shares
sold........................ 3,550,148 13,508,423
Net asset value of shares
issued
in reinvestment of dividends
and distributions........... 434,866 199,822
Cost of shares reacquired...... (1,563,629) (1,205,115)
------------ ------------
Net increase in net assets from
Series share transactions... 2,421,385 12,503,130
------------ ------------
Total increase.................... 2,255,725 13,079,214
Net Assets
Beginning of period............... 13,079,214 --
------------ ------------
End of period..................... $ 15,334,939 $ 13,079,214
------------ ------------
------------ ------------
</TABLE>
- ------------
* Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-85
<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
fourteen 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 Net 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. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
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-86
<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, LLC.
(``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. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $7,161 ($0.006 per share for Class A, B, and C
shares; .05% of average net assets). The Series is not required to reimburse PMF
for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$7,200 in front-end sales charges resulting from sales of Class A shares during
the fiscal year ended August 31, 1996. From these fees, PMFD and PSI paid such
sales charges to affiliated broker-dealers which in turn paid commissions to
sales persons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1996, it
received approximately $37,500 and $200 in contingent deferred sales charges
imposed upon certain redemptions by Class B and 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, 1996, the Series incurred fees of approximately $4,200 for the services of
PMFS. As of August 31, 1996, 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 .45%, .85% and 1.10% of the average net assets of the Class A shares,
Class B shares and Class C shares, respectively, until further notice. For the
fiscal year ended August 31, 1996, PMF subsidized $212,409 ($0.17 per share for
Class A, B and C shares; 1.48% 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 fiscal year ended August 31, 1996 were $4,466,168 and
$2,553,985, respectively.
At August 31, 1996, the Series sold 60 financial futures contracts on the U.S.
Treasury Index of which 40 expire in September 1996 and 20 expire in December
1996. The value at disposition of such contracts is $652,063. The value of such
contracts on August 31, 1996 was $642,812, thereby resulting in an unrealized
gain of $9,251.
The cost basis of investments for federal income tax purposes is substantially
the same as for financial reporting purposes and, accordingly, as of
- --------------------------------------------------------------------------------
B-87
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
August 31, 1996, net unrealized appreciation for federal income tax purposes was
$437,932 (gross unrealized appreciation--$464,899; gross unrealized
depreciation--$26,967).
The Series will elect to treat net realized capital losses of approximately
$31,150 incurred in the ten month period ended August 31, 1996 as having been
incurred in the following fiscal year.
- ------------------------------------------------------------
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. A special exchange privilege is also available for
shareholders who qualify 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. Of the 1,277,494 shares of beneficial
interest issued and outstanding at August 31, 1996, PMF owned 171,821 shares.
Transactions in shares of beneficial interest for the fiscal year ended August
31, 1996 and the period ended August 31, 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------------- -------- ----------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold............................ 36,885 $ 448,439
Shares issued in reinvestment of
dividends and distributions.......... 4,000 48,647
Shares reacquired...................... (10,531) (126,891)
-------- ----------
Net increase in shares outstanding
before conversion.................... 30,354 370,195
Shares issued upon conversion from
Class B.............................. 11,406 137,525
<CAPTION>
-------- ----------
Net increase in shares outstanding..... 41,760 $ 507,720
-------- ----------
-------- ----------
September 19, 1994* through
August 31, 1995:
Shares sold............................ 279,870 $3,255,106
Shares issued in reinvestment of
dividends............................ 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
-------- ----------
-------- ----------
Class B Shares Amount
- --------------------------------------- -------- ----------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold............................ 204,563 $2,491,095
Shares issued in reinvestment of
dividends and distributions.......... 28,137 342,549
Shares reacquired...................... (115,555) (1,409,389)
-------- ----------
Net increase in shares outstanding
before conversion.................... 117,145 1,424,255
Shares reacquired upon conversion into
Class A.............................. (11,406) (137,525)
-------- ----------
Net increase in shares outstanding..... 105,739 $1,286,730
-------- ----------
-------- ----------
September 19, 1994* through
August 31, 1995:
Shares sold............................ 816,861 $9,471,988
Shares issued in reinvestment of
dividends............................ 14,410 171,145
Shares reacquired...................... (89,345) (1,066,264)
-------- ----------
Net increase in shares outstanding
before conversion.................... 741,926 8,576,869
Shares reacquired upon conversion into
Class A.............................. (4,086) (49,084)
-------- ----------
Net increase in shares outstanding..... 737,840 $8,527,785
-------- ----------
-------- ----------
<CAPTION>
Class C
- ---------------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold............................ 50,226 $ 610,614
Shares issued in reinvestment of
dividends and distributions.......... 3,592 43,670
Shares reacquired...................... (2,216) (27,349)
-------- ----------
Net increase in shares outstanding..... 51,602 $ 626,935
-------- ----------
-------- ----------
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
-------- ----------
-------- ----------
- ---------------
* Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
B-88
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights HAWAII INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C
---------------------------- ---------------------------- ----------
September 19, September 19,
Year 1994(b) Year 1994(b) Year
Ended Through Ended Through Ended
August 31, August 31, August 31, August 31, August 31,
1996 1995 1996 1995 1996
----- ----- ---------- ----- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $12.13 $ 11.64 $ 12.13 $ 11.64 $12.13
----- ----- ---------- ----- -----
Income from investment operations
Net investment income(d)...................... .66 .58 .61 .54 .57
Net realized and unrealized gain on investment
transactions............................... (.05) .49 (.05) .49 (.05)
----- ----- ---------- ----- -----
Total from investment operations........... .61 1.07 .56 1.03 .52
----- ----- ---------- ----- -----
Less distributions
Dividends from net investment income.......... (.66) (.58) (.61) (.54) (.57)
Distributions from net realized gains......... (.08) -- (.08) -- (.08)
----- ----- ---------- ----- -----
Total distributions........................ (.74) (.58) (.69) (.54) (.65)
----- ----- ---------- ----- -----
Net asset value, end of period................ $12.00 $ 12.13 $ 12.00 $ 12.13 $12.00
----- ----- ---------- ----- -----
----- ----- ---------- ----- -----
TOTAL RETURN(c):.............................. 5.01% 9.42% 4.60% 9.03% 4.34%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $3,800 $ 3,333 $ 10,126 $ 8,949 $1,409
Average net assets (000)...................... $3,620 $ 2,778 $ 9,599 $ 6,270 $1,103
Ratios to average net assets:(d)
Expenses, including distribution fees...... .45% .46%(a) .85% .86%(a) 1.10%
Expenses, excluding distribution fees...... .35% .36%(a) .35% .36%(a) .35%
Net investment income...................... 5.38% 5.32%(a) 4.98% 5.03%(a) 4.74%
Portfolio turnover rate....................... 18% 75% 18% 75% 18%
<CAPTION>
September 19,
1994(b)
Through
August 31,
1995
<S> <C>
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 11.64
-----
Income from investment operations
Net investment income(d)...................... .51
Net realized and unrealized gain on investment
transactions............................... .49
-----
Total from investment operations........... 1.00
-----
Less distributions
Dividends from net investment income.......... (.51)
Distributions from net realized gains......... --
-----
Total distributions........................ (.51)
-----
Net asset value, end of period................ $ 12.13
-----
-----
TOTAL RETURN(c):.............................. 8.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 797
Average net assets (000)...................... $ 373
Ratios to average net assets:(d)
Expenses, including distribution fees...... 1.11%(a)
Expenses, excluding distribution fees...... .36%(a)
Net investment income...................... 4.79%(a)
Portfolio turnover rate....................... 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 returns for periods of less than a full year are not annualized.
(d) Net of expense subsidy and management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-89
<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, 1996, the related statements of operations for the year
then ended and of changes in net assets and the financial highlights for the
year then ended and 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 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, 1996 by correspondence with the custodian and broker. 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, Hawaii Income Series, as of August 31, 1996, 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 14, 1996
B-90
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--95.5%
- ---------------------------------------------------------------------------------------------------------------------------------
Baltimore Conv. Ctr. Rev., F.G.I.C. Aaa 5.75% 9/01/08 $ 1,075 $ 1,095,694
Baltimore Econ. Dev. Lease Rev., Armistead Partnership BBB+(c) 7.00 8/01/11 1,000 1,050,410
Baltimore Rev., Ref. Wastewater Proj., Ser. A, F.G.I.C. Aaa 5.50 7/01/26 1,100 1,042,910
Charles Cnty. Aa 5.50 3/01/05 665 685,941
Charles Cnty. Aa 5.50 3/01/06 695 713,626
Gaithersburg Hosp. Fac. Rev., Ref. Impvt. Shady Grove
Adventist Hosp., F.S.A. Aaa 5.50 9/01/15 1,000 959,060
Gaithersburg Nursing Home Rev., Ref. Shady Grove Adventist
Hosp., F.S.A. Aaa 5.50 9/01/15 1,000 959,060
Harford Cnty. Aa 5.50 3/01/06 1,500 1,545,885
Kent Cnty., Coll. Rev. Proj. & Ref., Washington Coll. Proj. Baa 7.70 7/01/18 750 812,573
Maryland St. & Local Facs., Second Ser. Aaa 5.125 10/15/10 1,500 1,452,300
Maryland St. Hlth. & Higher Edl. Facs., Auth. Rev.,
Doctor's Comn. Hosp. Baa 5.50 7/01/24 1,000 860,580
Howard Cnty. Gen. Hosp. Baa1 5.50 7/01/21 1,000 868,970
Proj. & Ref. Mercy Medical Center, F.S.A. Aaa 5.75 7/01/26 1,800 1,754,748
Maryland St. Hsg. & Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev. Prog., Sixth Ser. Aa 7.125 4/01/14 705 722,569
Sngl. Fam. Mtge. Rev. Prog., Third Ser. Aa 8.00 4/01/18 750 763,282
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. For
Physics BBB(c) 6.625 1/01/17 1,000 1,008,150
Maryland St. Trans. Auth., Baltimore Washington Int'l.
Airport, F.G.I.C. Aaa 6.25 7/01/14 1,750 1,813,542
Maryland Wtr. Quality Fin. Admin., Revolving Loan Fund
Rev.,
Ser. A Aa 5.90 9/01/04 565 600,267
Montgomery Cnty.,
Cons. Pub. Impvt. Aaa 9.75 6/01/01 450 547,614
Cons. Pub. Impvt., Ser. A Aaa 5.75 10/01/07 1,300 1,357,577
Northeast Waste Disp. Auth., Baltimore City Sludge Proj. NR 7.25 7/01/07 904 923,906
Ocean City,
M.B.I.A. Aaa 5.40 10/01/11 500 486,505
M.B.I.A. Aaa 5.50 10/01/15 1,235 1,188,366
Prince Georges Cnty.,
Cons. Pub. Impvt., M.B.I.A. Aaa 5.25 1/01/15 750 714,315
Hosp. Rev., Dimensions Hlth. Corp. A 5.30 7/01/24 750 667,297
Pollution Control Rev., Ref. Potomac Elec. Proj.,
M.B.I.A. Aaa 5.75 3/15/10 1,100 1,118,623
Ref. Cons. Pub. Impvt. A1 5.25 10/01/11 1,000 971,550
Stormwater Mgmt. Aa 6.50 3/15/03 1,140 1,242,338
Puerto Rico Comnwlth.,
Aqueduct & Swr. Auth. Rev., M.B.I.A. Aaa 6.00 7/01/07 1,000 1,070,690
Gen. Oblig., F.S.A. Aaa 7.958 (d) 7/01/20 1,000 976,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-91
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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 Ind. Tourist, Edu. Med. & Env. Ctrl. Facs.,
M.B.I.A. Aaa 6.25% 7/01/24 $ 1,250 $ 1,294,138
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 7.065(d) 1/16/15 1,000 922,500
Takoma Park Hosp. Facs. Rev., Ref. Impvt., Washington
Adventist Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,086,550
Washington Dist. of Columbia, Metro. Area Transit Auth.
Rev., F.G.I.C. Aaa 6.00 7/01/08 1,000 1,064,500
Washington Suburban San. Dist., Water Supply Aa1 5.25 6/01/14 950 904,600
-----------
Total long-term investments (cost $34,756,010) 35,246,886
-----------
SHORT-TERM INVESTMENTS--3.5%
Puerto Rico Comnwlth.,
Gov't. Dev. Bank, Ser. 85, F.R.W.D. VMIG1 3.10 9/04/96 100 100,000
Hwy. & Trans. Auth. Rev., F.R.W.D. VMIG1 3.10 9/04/96 1,200 1,200,000
-----------
Total short-term investments (cost $1,300,000) 1,300,000
-----------
Total Investments--99.0%
(cost $36,056,010; Note 4) 36,546,886
Other assets in excess of liabilities--1.0% 350,914
-----------
Net Assets--100% $36,897,800
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
F.G.I.C.--Financial Guaranty Insurance Company.
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.
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-92
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets August 31, 1996
---------------
Investments, at value (cost $36,056,010).................................................................. $36,546,886
Interest receivable....................................................................................... 643,847
Other assets.............................................................................................. 1,161
Receivable for Series shares sold......................................................................... 653
---------------
Total assets........................................................................................... 37,192,547
---------------
Liabilities
Bank overdraft............................................................................................ 71,487
Payable for Series shares reacquired...................................................................... 88,264
Accrued expenses.......................................................................................... 81,508
Dividends payable......................................................................................... 26,793
Management fee payable.................................................................................... 14,372
Distribution fee payable.................................................................................. 9,623
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 294,747
---------------
Net Assets................................................................................................ $36,897,800
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 34,329
Paid-in capital in excess of par....................................................................... 35,939,039
---------------
35,973,368
Accumulated net realized gain on investments........................................................... 433,556
Net unrealized appreciation on investments............................................................. 490,876
---------------
Net assets, August 31, 1996............................................................................... $36,897,800
---------------
---------------
Class A:
Net asset value and redemption price per share
($18,338,535 / 1,707,253 shares of beneficial interest issued and outstanding)...................... $10.74
Maximum sales charge (3.0% of offering price).......................................................... .33
---------------
Maximum offering price to public....................................................................... $11.07
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($18,512,086 / 1,721,298 shares of beneficial interest issued and outstanding)...................... $10.75
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($47,179 / 4,387 shares of beneficial interest issued and outstanding).............................. $10.75
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-93
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................... $ 2,210,285
---------------
Expenses
Management fee............................. 192,126
Distribution fee--Class A.................. 18,483
Distribution fee--Class B.................. 99,492
Distribution fee--Class C.................. 324
Custodian's fees and expenses.............. 66,000
Reports to shareholders.................... 43,000
Registration fees.......................... 36,000
Transfer agent's fees and expenses......... 31,000
Audit fee and expenses..................... 12,300
Legal fees and expenses.................... 10,000
Trustees' fees and expenses................ 3,900
Miscellaneous.............................. 9,154
---------------
Total expenses.......................... 521,779
Less: Management fee waiver................ (19,213)
Custodian fee credit.................... (17,574)
---------------
Net expenses............................ 484,992
---------------
Net investment income......................... 1,725,293
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.................... 786,866
Financial futures contracts................ 191,897
Written options transactions............... 13,504
---------------
992,267
---------------
Net change in unrealized
appreciation/depreciation of:
Investments................................ (677,782)
Financial futures contracts................ 4,219
---------------
(673,563)
---------------
Net gain on investments....................... 318,704
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,043,997
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income.......... $ 1,725,293 $ 2,185,896
Net realized gain (loss) on
investment transactions..... 992,267 (429,571)
Net change in unrealized
appreciation/depreciation of
investments................. (673,563) 442,801
------------ ------------
Net increase in net assets
resulting from operations... 2,043,997 2,199,126
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (867,743) (561,997)
Class B..................... (855,800) (1,621,246)
Class C..................... (1,750) (2,653)
------------ ------------
(1,725,293) (2,185,896)
------------ ------------
Distributions from net realized
gains
Class A..................... -- (21,234)
Class B..................... -- (419,138)
Class C..................... -- (255)
------------ ------------
-- (440,627)
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 2,762,194 2,121,739
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 1,114,649 1,744,018
Cost of shares reacquired...... (6,489,419) (18,256,314)
------------ ------------
Net decrease in net assets from
Series share transactions... (2,612,576) (14,390,557)
------------ ------------
Total decrease.................... (2,293,872) (14,817,954)
Net Assets
Beginning of year................. 39,191,672 54,009,626
------------ ------------
End of year....................... $ 36,897,800 $ 39,191,672
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-94
<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
fourteen 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.
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 writen option. There were no written
options outstanding at August 31, 1996.
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. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management. 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
- --------------------------------------------------------------------------------
B-95
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND 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.
Custody Fee Credits: The Fund 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, LLC.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $19,213 ($0.006 per share for Class A, B and C
shares; .05% of average net assets) until further notice. The Series' is not
required to reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensates PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$4,400 in front-end sales charges resulting from sales of Class A shares during
the year ended August 31, 1996. From these fees, PMFD and PSI paid such sales
charges to an affiliated broker-dealer which in turn paid commissions to
salespersons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1996, it received
approximately $33,400 and $200 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 year ended August 31, 1996,
the Series incurred fees of approximately $23,900 for the services of PMFS. As
of August 31, 1996, approximately $1,900 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1996 were $15,255,672 and
$16,830,152, respectively.
- --------------------------------------------------------------------------------
B-96
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
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,
1996, net unrealized appreciation of investments for federal income tax purposes
is $490,876 (gross unrealized appreciation--$836,497; gross unrealized
depreciation $345,621).
The Fund utilized its capital loss carryforward of approximately $399,100 to
offset the Series net taxable gains realized and recognized in the fiscal year
ended August 31, 1996.
Transactions in written options during the period ended August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number
of Premiums
Contracts Received
----------- ----------
<S> <C> <C>
Options written................... 60 $ 13,504
Options expired................... )(60 (13,504)
----------- ----------
Options outstanding at August 31,
1996 0 $ 0
----------- ----------
----------- ----------
</TABLE>
- ------------------------------------------------------------
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. A special exchange privilege is also available for
shareholders who qualify 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 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 58,783 $ 649,434
Shares issued in reinvestment of
dividends........................ 53,117 575,999
Shares reacquired.................. (308,466) (3,328,355)
---------- ------------
Net decrease in shares outstanding
before conversion................ (196,566) (2,102,922)
Shares issued upon conversion from
Class B.......................... 240,370 2,604,069
---------- ------------
Net increase in shares
outstanding...................... 43,804 $ 501,147
---------- ------------
---------- ------------
<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
---------- ------------
---------- ------------
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 192,644 $ 2,088,999
Shares issued in reinvestment of
dividends........................ 49,517 537,616
Shares reacquired.................. (287,898) (3,130,338)
---------- ------------
Net decrease in shares outstanding
before conversion................ (45,737) (503,723)
Shares reacquired upon conversion
into Class A..................... (240,066) (2,604,069)
---------- ------------
Net decrease in shares
outstanding...................... (285,803) $ (3,107,792)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 2,200 $ 23,761
Shares issued in reinvestment of
dividends........................ 96 1,034
Shares reacquired.................. (2,795) (30,726)
---------- ------------
Net decrease in shares
outstanding...................... (499) $ (5,931)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-97
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................. $ 10.66 $ 10.66 $ 11.64 $11.11 $10.67
------- ------- ------- ------ ------
Income from investment operations
Net investment income............... .51(a) .53(a) .57 .62 .63
Net realized and unrealized gain
(loss) on investment
transactions..................... .08 .10 (.77) .65 .44
------- ------- ------- ------ ------
Total from investment
operations.................... .59 .63 (.20) 1.27 1.07
------- ------- ------- ------ ------
Less distributions
Dividends from net investment
income........................... (.51) (.53) (.57) (.62) (.63)
Distributions from net realized
gains............................ -- (.10) (.21) (.12) --
------- ------- ------- ------ ------
Total distributions.............. (.51) (.63) (.78) (.74) (.63)
------- ------- ------- ------ ------
Net asset value, end of year........ $ 10.74 $ 10.66 $ 10.66 $11.64 $11.11
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):.................... 5.58% 6.32% (1.75)% 11.89% 10.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....... $18,339 $17,726 $ 2,709 $2,930 $1,335
Average net assets (000)............ $18,484 $11,341 $ 2,877 $2,068 $1,080
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.10%(a) 1.30%(a) .95% .96% .96%
Expenses, excluding distribution
fees.......................... 1.00%(a) 1.20%(a) .85% .86% .86%
Net investment income............ 4.69%(a) 4.96%(a) 5.18% 5.51% 5.80%
Portfolio turnover rate............. 42% 49% 40% 41% 34%
</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-98
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- -----------------------------
Year Ended August 31, Year Ended August 31,
------------------------------------------------------- -----------------------------
1996 1995 1994 1993 1992 1996 1995
------- ------- ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 10.67 $ 10.67 $ 11.65 $ 11.12 $ 10.68 $10.67 $ 10.67
------- ------- ------- ------- ------- ----- ------
Income from investment operations
Net investment income............... .47(a) .49(a) .53 .58 .59 .44(a) .47(a)
Net realized and unrealized gain
(loss) on investment
transactions..................... .08 .10 (.77) .65 .44 .08 .10
------- ------- ------- ------- ------- ----- ------
Total from investment
operations.................... .55 .59 (.24) 1.23 1.03 .52 .57
------- ------- ------- ------- ------- ----- ------
Less distributions
Dividends from net investment
income........................... (.47) (.49) (.53) (.58) (.59) (.44) (.47)
Distributions from net realized
gains............................ -- (.10) (.21) (.12) -- -- (.10)
------- ------- ------- ------- ------- ----- ------
Total distributions.............. (.47) (.59) (.74) (.70) (.59) (.44) (.57)
------- ------- ------- ------- ------- ----- ------
Net asset value, end of period...... $ 10.75 $ 10.67 $ 10.67 $ 11.65 $ 11.12 $10.75 $ 10.67
------- ------- ------- ------- ------- ----- ------
------- ------- ------- ------- ------- ----- ------
TOTAL RETURN(b):.................... 5.16% 5.88% (2.13)% 11.43% 9.90% 4.90% 5.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $18,512 $21,414 $51,198 $57,598 $51,313 $ 47 $ 52
Average net assets (000)............ $19,898 $33,497 $55,223 $53,780 $50,970 $ 43 $ 58
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.50%(a) 1.55%(a) 1.35% 1.36% 1.37% 1.75%(a) 1.82%(a)
Expenses, excluding distribution
fees.......................... 1.00%(a) 1.05%(a) .85% .86% .87% 1.00%(a) 1.07%(a)
Net investment income............ 4.30%(a) 4.84%(a) 4.77% 5.11% 5.42% 4.05%(a) 4.55%(a)
Portfolio turnover rate............. 42% 49% 40% 41% 34% 42% 49%
<CAPTION>
August 1,
1994(d)
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-99
<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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, Maryland Series, as of August 31, 1996, 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 14, 1996
B-100
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--97.3%
- ---------------------------------------------------------------------------------------------------------------------------------
Attleboro Massachusetts, Gen. Oblig., A.M.B.A.C. Aaa 5.125% 12/01/15 $ 1,000 $ 924,420
Boston Mass. Ind. Dev. Fin. Auth., Swr. Fac. Rev.,
Harbor Electric Energy Co. Proj. Baa1 7.375 5/15/15 1,500 1,599,465
Boston Mass. Rev., Boston City Hospital, F.H.A. Aa 5.75 2/15/23 2,000 1,916,160
Brockton Massachusetts Gen. Oblig. Baa1 6.125 6/15/18 1,030 1,035,099
Gloucester Massachusetts Gen. Oblig., F.S.A. Aaa 5.50 11/15/13 2,000 1,960,600
Holyoke Massachusetts Gen. Oblig., School Proj., M.B.I.A. Aaa 8.10 6/15/05 700 832,265
Lowell Massachusetts Gen. Oblig. Aaa 7.625 2/15/10 750(e) 856,695
Lynn Mass. Wtr. & Swr. Comn., Gen. Rev., Ser. A, M.B.I.A. Aaa 7.25 12/01/10 2,100(e) 2,347,149
Mass. Bay Trans. Auth., Gen. Trans., Ser. B, A.M.B.A.C. Aaa 5.375 3/01/25 1,000 933,190
Mass. St. Gen. Oblig.,
Ser. A A Zero 8/01/06 665 396,945
Ser. A, A.M.B.A.C. Aaa 5.00 7/01/12 1,000 935,470
Ser. C, F.G.I.C. Aaa 6.00 8/01/09 1,500 1,585,725
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Beth Israel Hospital, A.M.B.A.C. Aaa 8.623(d) 7/01/25 1,500 1,486,875
Dana Farber Cancer Proj., Ser. G-1 A1 6.25 12/01/22 625 626,931
Faulkner Hospital, Ser. C Baa1 6.00 7/01/23 1,500 1,370,370
Holyoke Hospital, Ser. B Baa1 6.50 7/01/15 1,500 1,429,965
Jordan Hospital, Ser. C A-(c) 6.875 10/01/22 1,350 1,396,764
Med Academic & Scientific A A-(c) 6.625 1/01/15 1,000 1,030,430
Newton-Wellesley Hospital, M.B.I.A. Aaa 5.875 7/01/15 1,000 995,960
Newton-Wellesley Hospital, M.B.I.A. Aaa 6.00 7/01/18 1,000 999,900
Valley Regional Hlth. Sys. AAA(c) 7.00 7/01/10 825 933,397
Valley Regional Hlth. Sys., Ser. B Aaa 8.00 7/01/18 1,000(e) 1,132,760
Winchester Hospital, Ser. D AAA(c) 5.75 7/01/24 2,000 1,893,820
Mass. St. Hsg. Fin. Agcy. Hsg. Rev., Sngl. Fam. Mtge., Ser.
6 Aa 8.10 12/01/14 1,755 1,848,278
Mass. St. Ind. Fin. Agcy. Rev.,
Brooks School A 5.95 7/01/23 640 619,142
Cape Cod Hlth. Sys. Aaa 8.50 11/15/20 2,000(e) 2,323,140
Phillips Academy Aa1 5.375 9/01/23 1,695 1,566,960
Mass. St. Mun. Wholesale Elec. Co. Pwr. Supply Sys. Rev.,
Ser. A, A.M.B.A.C. Aaa 5.00 7/01/14 1,500 1,350,645
Mass. St. Port Authority Rev., Ser. B Aa 5.00 7/01/18 1,000 871,410
Mass. St. Water Pollution Abatement Trust,
Water Pollution Rev. Aa 6.00 8/01/05 1,000 1,060,860
Water Pollution Rev. Aa 6.375 2/01/15 1,000 1,050,850
Mass. St. Water Res. Auth., Ser. B, M.B.I.A. Aaa 6.25 12/01/11 1,000 1,078,800
Palmer Massachusetts Gen. Oblig., Ser. F, A.M.B.A.C. Aaa 7.30 3/01/10 500(e) 552,395
Plymouth County Corr. Facs. Proj., Cert. of Part., Ser. A A-(c) 7.00 4/01/22 500 549,870
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-101
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Commonwealth,
Aqueduct & Swr. Auth. Rev., M.B.I.A. Aaa 6.00% 7/01/07 $ 1,000 $ 1,070,690
Gen. Oblig. Baa1 5.25 7/01/18 1,000 899,200
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 1,000 1,154,440
Gen. Oblig., F.S.A. Aaa 7.958(d) 7/01/20 1,250 1,220,312
Hwy. & Trans. Auth. Rev., Ser. T Baa1 6.625 7/01/18 1,380 (e) 1,533,263
Puerto Rico Electric Pwr. Auth. Pwr. Rev., Ser. T Baa1 6.375 7/01/24 1,000 1,040,260
Quabbin Mass. Reg. School Dist., Jr.-Sr. High Sch. Proj.,
M.B.I.A. Aaa 5.50 6/15/06 1,045 1,069,537
-----------
Total long-term investments (cost $46,726,526) 49,480,407
-----------
SHORT-TERM INVESTMENTS--1.6%
Mass. St. Hlth. & Edl. Facs. Auth. Rev., Cap. Asset Prog.,
Ser. D, M.B.I.A., F.R.D.D. VMIG1 3.75 9/03/96 700 700,000
Mass. St. Ind. Fin. Agcy., Pollution Control Rev. Ser. 92
F.R.D.D. VMIG1 3.60 9/03/96 100 100,000
-----------
Total short-term investments (cost $800,000) 800,000
-----------
Expiration
OUTSTANDING CALL OPTION PURCHASED Date Contracts(f)
---------- ---------
U.S. Treasury Bond Future, expiring Sept. '96 @ $114.00
(cost $18,435) NR -- 9/21/96 50 781
Total Investments--98.9%
(cost $47,544,961; Note 4) 50,281,188
Other assets in excess of liabilities --1.1% 580,698
-----------
Net Assets--100% $50,861,886
-----------
-----------
</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.
M.B.I.A.--Municipal Bond Insurance Corporation.
(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) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) One contract equals $1,000 face value.
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-102
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1996
Investments, at value (cost $47,544,961).................................................................. $ 50,281,188
Cash...................................................................................................... 63,452
Interest receivable....................................................................................... 637,161
Receivable for Series shares sold......................................................................... 34,829
Deferred expenses and other assets........................................................................ 1,507
---------------
Total assets........................................................................................... 51,018,137
---------------
Liabilities
Accrued expenses.......................................................................................... 81,993
Dividends payable......................................................................................... 39,686
Management fee payable.................................................................................... 19,675
Distribution fee payable.................................................................................. 12,197
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 156,251
---------------
Net Assets................................................................................................ $ 50,861,886
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 44,098
Paid-in capital in excess of par....................................................................... 47,510,044
---------------
47,554,142
Accumulated net realized gain on investments........................................................... 571,517
Net unrealized appreciation on investments............................................................. 2,736,227
---------------
Net assets, August 31, 1996............................................................................... $ 50,861,886
---------------
---------------
Class A:
Net asset value and redemption price per share
($28,058,042 / 2,431,996 shares of beneficial interest issued and outstanding)...................... $11.54
Maximum sales charge (3% of offering price)............................................................ .36
---------------
Maximum offering price to public....................................................................... $11.90
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($22,758,409 / 1,973,880 shares of beneficial interest issued and outstanding)...................... $11.53
---------------
---------------
Class C:
Net asset value, offer price and redemption price per share
($45,435 / 3,941 shares of beneficial interest issued and outstanding).............................. $11.53
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-103
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................... $ 3,296,943
---------------
Expenses
Management fee............................. 269,415
Distribution fee--Class A.................. 28,091
Distribution fee--Class B.................. 128,755
Distribution fee--Class C.................. 304
Reports to shareholders.................... 86,000
Custodian's fees and expenses.............. 75,000
Registration fees.......................... 50,000
Transfer agent's fees and expenses......... 35,000
Audit fee and expenses..................... 12,300
Legal fees and expenses.................... 12,000
Trustees' fees and expenses................ 3,900
Miscellaneous.............................. 4,289
---------------
Total expenses.......................... 705,054
Less: Management fee waiver............. (26,941)
Custodian fee credit................. (4,246)
---------------
Net expenses............................... 673,867
---------------
Net investment income......................... 2,623,076
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,055,600
Financial futures transactions............. (57,631)
Written options transactions............... 16,842
---------------
1,014,811
---------------
Net change in unrealized depreciation on:
Investments................................ (1,098,536)
---------------
Net loss on investments....................... (83,725)
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,539,351
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
In Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income............ $ 2,623,076 $ 3,002,835
Net realized gain on investment
transactions.................. 1,014,811 294,358
Net change in unrealized
appreciation/depreciation of
investments................... (1,098,536) 871,511
----------- -----------
Net increase in net assets
resulting from operations..... 2,539,351 4,168,704
----------- -----------
Dividends and distributions (Note 1)
Dividends from net investment
income
Class A....................... (1,420,826) (884,881)
Class B....................... (1,200,467) (2,117,251)
Class C....................... (1,783) (703)
----------- -----------
(2,623,076) (3,002,835)
----------- -----------
Distributions from net realized
gains
Class A....................... (162,429) --
Class B....................... (151,088) --
Class C....................... (242) --
----------- -----------
(313,759) --
----------- -----------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares sold.... 2,218,216 3,105,413
Net asset value of shares issued
in reinvestment of
dividends..................... 1,723,072 1,755,219
Cost of shares reacquired........ (8,587,851) (7,833,814)
----------- -----------
Net decrease in net assets from
Series share transactions..... (4,646,563) (2,973,182)
----------- -----------
Total decrease................... (5,044,047) (1,807,313)
Net Assets
Beginning of year................... 55,905,933 57,713,246
----------- -----------
End of year......................... $50,861,886 $55,905,933
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-104
<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
fourteen 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.
Options: The Fund 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 Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund 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 Fund 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 Fund 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.
The Fund, 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 Fund 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.
Securities Transactions and Net 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. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
- --------------------------------------------------------------------------------
B-105
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
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.
Custody Fee Credits: The Fund 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 LLC.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''). PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $26,941 ($0.01 per share; .05% of average net
assets) until further notice. The Series is not required to reimburse PMF for
such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI''), became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also distributor of the Class B and Class C shares
of the Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$6,700 in front-end sales charges resulting from sales of Class A shares during
the year ended August 31, 1996. From these fees, PMFD and PSI paid such sales
charges to affiliated broker-dealers, which in turn paid commissions to sales
persons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1996, it received
approximately $41,400 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other 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,
1996, the Series incurred fees of approximately $25,300 for the services of
PMFS. As of August 31, 1996, approximately $2,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the statement of operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-106
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1996, were $9,435,421 and
$12,728,317, respectively.
The cost basis of investments for federal income tax purposes, at August 31,
1996, was $47,653,790 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $2,627,398 (gross unrealized
appreciation--$2,867,364, gross unrealized depreciation--$239,966).
Transactions in written options during the year ended August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written...................... 75 $ 16,842
Options expired...................... (75) (16,842)
--------- --------
Options outstanding at August 31,
1996............................... 0 $ 0
--------- --------
--------- --------
</TABLE>
- ------------------------------------------------------------
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
will 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 qualify 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 year ended August 31, 1996
and fiscal year ended August 31, 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 41,217 $ 487,329
Shares issued in reinvestment of
dividends and distributions....... 80,396 943,108
Shares reacquired................... (389,160) (4,544,162)
---------- ------------
Net decrease in shares outstanding
before conversion................. (267,547) (3,113,725)
Shares issued upon conversion from
Class B........................... 333,272 3,892,048
---------- ------------
Net increase in shares
outstanding....................... 65,725 $ 778,323
---------- ------------
---------- ------------
Year ended August 31, 1995:
Shares sold......................... 32,229 $ 365,268
Shares issued in reinvestment of
dividends and distributions....... 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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-107
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 144,346 $ 1,689,531
Shares issued in reinvestment of
dividends and distributions....... 66,308 777,976
Shares reacquired................... (343,488) (4,032,383)
---------- ------------
Net decrease in shares outstanding
before conversion................. (132,834) (1,564,876)
Shares reacquired upon conversion
into Class A...................... (333,455) (3,892,048)
---------- ------------
Net decrease in shares
outstanding....................... (466,289) $ (5,456,924)
---------- ------------
---------- ------------
Year ended August 31, 1995:
Shares sold......................... 241,751 $ 2,725,137
Shares issued in reinvestment of
dividends and distributions....... 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)
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 3,492 $ 41,356
Shares issued in reinvestment of
dividends and distributions....... 170 1,988
Shares reacquired................... (958) (11,306)
---------- ------------
Net increase in shares
outstanding....................... 2,704 $ 32,038
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
B-108
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........... $ 11.63 $ 11.37 $12.17 $11.50 $10.94
---------- ------- ------ ------ ------
Income from investment operations
Net investment income........................ .59(a) .65(a) .67 .68 .69
Net realized and unrealized gain (loss) on
investment transactions................... (.02) .26 (.73) .67 .56
---------- ------- ------ ------ ------
Total from investment operations.......... .57 .91 (.06) 1.35 1.25
---------- ------- ------ ------ ------
Less distributions
Dividends from net investment income......... (.59) (.65) (.67) (.68) (.69)
Distributions from net realized gains........ (.07) -- (.07) -- --
---------- ------- ------ ------ ------
Total distributions....................... (.66) (.65) (.74) (.68) (.69)
---------- ------- ------ ------ ------
Net asset value, end of year................. $ 11.54 $ 11.63 $11.37 $12.17 $11.50
---------- ------- ------ ------ ------
---------- ------- ------ ------ ------
TOTAL RETURN(b):............................. 4.93% 8.33% (.58)% 12.10% 11.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................ $ 28,058 $27,525 $2,293 $2,325 $ 903
Average net assets (000)..................... $ 28,091 $15,837 $2,578 $1,336 $ 770
Ratios to average net assets:
Expenses, including distribution fees..... 1.06%(a) .97%(a) .87% .95% .99%
Expenses, excluding distribution fees..... .96%(a) .87%(a) .77% .85% .89%
Net investment income..................... 5.06%(a) 5.59%(a) 5.60% 5.79% 6.14%
Portfolio turnover rate...................... 18% 36% 33% 56% 32%
</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-109
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- ------------------
Year Ended
Year Ended August 31, August 31,
------------------------------------------------------- ------------------
1996 1995 1994 1993 1992 1996 1995
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........... $ 11.62 $ 11.36 $ 12.17 $ 11.49 $ 10.94 $ 11.62 $11.36
------- ------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income........................ .54(a) .60(a) .61 .63 .64 .51(a) .57(a)
Net realized and unrealized gain (loss) on
investment transactions................... (.02) .26 (.74) .68 .55 (.02) .26
------- ------- ------- ------- ------- ------- ------
Total from investment operations.......... .52 .86 (.13) 1.31 1.19 .49 .83
------- ------- ------- ------- ------- ------- ------
Less distributions
Dividends from net investment income......... (.54) (.60) (.61) (.63) (.64) (.51) (.57)
Distributions from net realized gains........ (.07) -- (.07) -- -- (.07) --
------- ------- ------- ------- ------- ------- ------
Total distributions....................... (.61) (.60) (.68) (.63) (.64) (.58) (.57)
------- ------- ------- ------- ------- ------- ------
Net asset value, end of year................. $ 11.53 $ 11.62 $ 11.36 $ 12.17 $ 11.49 $ 11.53 $11.62
------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------
TOTAL RETURN(b):............................. 4.51% 7.90% (1.15)% 11.77% 11.23% 4.26% 7.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................ $22,758 $28,367 $55,420 $61,121 $53,449 $ 45 $ 14
Average net assets (000)..................... $25,751 $39,455 $59,544 $55,965 $50,607 $ 41 $ 14
Ratios to average net assets:
Expenses, including distribution fees..... 1.46%(a) 1.34%(a) 1.27% 1.35% 1.39% 1.72%(a) 1.60%(a)
Expenses, excluding distribution fees..... .96%(a) .84%(a) .77% .85% .89% .97%(a) .85%(a)
Net investment income..................... 4.66%(a) 5.37%(a) 5.20% 5.39% 5.74% 4.39%(a) 5.07%(a)
Portfolio turnover rate...................... 18% 36% 33% 56% 32% 18% 36%
<CAPTION>
<S> <C>
August 1,
1994(d)
through
August 31,
1994
-----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........... $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 year................. $11.36
-----
-----
TOTAL RETURN(b):............................. (0.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (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>
- ---------------
(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-110
<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, 1996, 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1996
B-111
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Boston Wtr. & Swr. Comm., Ser. 94A, F.R.W.D. VMIG1 3.10% 9/05/96 $ 1,300 $ 1,300,000
Brazos River Auth. Poll. Ctrl. Rev.,
Texas Util. Elec. Co. A, Ser. 95A, F.R.D.D. VMIG1 3.95 9/03/96 1,300 1,300,000
Texas Util. Elec. Co., Ser. 95C, F.R.D.D. VMIG1 4.00 9/03/96 200 200,000
Chicopee Mass., Gen. Oblig., Ser. 96, F.S.A. Aaa 6.00 8/01/97 600 611,201
Dracut Mass., Gen. Oblig., A.M.B.A.C. Aaa 6.00 6/01/97 740 752,373
Fitchburg Mass., Gen. Oblig., Ser. 96, A.M.B.A.C. Aaa 5.50 3/01/97 1,200 1,212,824
Holyoke Poll. Ctrl. Rev., Ser. 88, F.R.W.D. A-1+(c) 3.10 9/04/96 900 900,000
Mashpee Mass., Ser. 96, B.A.N. NR 4.00 2/07/97 1,500 1,501,890
Mass. Edl. Loan Auth. Rev., Issue E, Ser. 96A, F.R.W.D. A-1+(c) 3.40 9/04/96 1,500 1,500,000
Mass. Mun. Whsl. Elec. Co. Pwr. Supply Sys. Rev., Ser. 94C,
F.R.W.D. VMIG1 3.35 9/04/96 2,500 2,500,000
Mass. St., Gen. Oblig., Ded. Inc.Tax, Ser. 90B, F.R.D.D. VMIG1 3.65 9/03/96 1,700 1,700,000
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Boston Univ., Ser. 85H, T.E.C.P. VMIG1 3.50 10/17/96 2,000 2,000,000
Cap. Asset Prog., Ser. 85C, F.R.D.D., M.B.I.A. VMIG1 3.55 9/03/96 600 600,000
Cap. Asset Prog., Ser. D, F.R.D.D., M.B.I.A. VMIG1 3.75 9/03/96 1,200 1,200,000
Harvard Univ., Ser. 89L, T.E.C.P. VMIG1 3.55 12/13/96 1,300(d) 1,300,000
Mass. St. Hsg. Fin. Agcy. Rev.,
Long Opt Per. Ser. 11, A.N.N.O.T., A.M.B.A.C. Aaa 4.00 9/01/97 1,695 1,695,000
Multi Family Rev., Ser. A, G.N.M.A., F.R.W.D. A-1+(c) 3.35 9/04/96 1,000 1,000,000
Mass. St. Ind. Fin. Agcy. Ind. Rev.,
Bradford College, Ser. 95A, F.R.W.D. VMIG1 3.40 9/04/96 1,500 1,500,000
Edgewood Retirement, Ser. 95C, F.R.W.D. VMIG1 3.45 9/04/96 2,500 2,500,000
Goddard House, Ser. 95, F.R.W.D. A-1(c) 3.55 9/05/96 2,000 2,000,000
Hazen Paper Co., Ser. 95, F.R.W.D. A-2(c) 3.60 9/05/96 1,350 1,350,000
Nutramax Prods. Inc., Ser. 96A, F.R.W.D. A-1+(c) 3.55 9/05/96 2,000 2,000,000
Ocean Spray Cranberries Inc. Proj., Ser. 84, A.N.N.O.T. A+(c) 3.95 10/15/96 1,400 1,400,000
Riverdale Mills, Ser. 95, F.R.W.D. A-2(c) 3.60 9/05/96 1,300 1,300,000
United Med. Corp. Issue, Ser. 92, F.R.W.D. P-1 3.35 9/04/96 700 700,000
Mass. St. Ind. Fin. Agcy. Poll. Ctrl. Rev., New England
Pwr. Co.
Proj., Ser. 93A, T.E.C.P. VMIG1 3.70 10/09/96 2,000 2,000,000
Mass. St. Wtr. Res. Auth., Fltg. Rate Rcpts., Ser. SG17,
F.R.W.D.,
A.M.B.A.C. A-1+(c) 3.60 9/05/96 1,440 1,440,000
Mass. St.. Port. Auth. Rev., Multi Modal Rev. Ref.,
Ser.95B, F.R.D.D. VMIG1 3.85 9/03/96 2,400 2,400,000
Town of Milford Mass., Gen. Oblig., M.B.I.A. Aaa 4.50 8/15/97 608 611,936
Natick Mass., Gen. Oblig., Ser. 96, B.A.N. NR 3.70 5/22/97 1,000 1,000,346
Needham Mass., Gen. Oblig., Ser. 96 Aa 4.75 5/15/97 865 871,327
North Attleborough Mass., Gen. Oblig., Ser. 93A, M.B.I.A. Aaa 3.80 1/15/97 728 728,168
Northampton Mass., Gen. Oblig., Ser. 96, M.B.I.A. Aaa 4.25 5/15/97 752 754,552
Peabody Mass., Gen. Oblig., Ser. 96, B.A.N. NR 4.15 8/15/97 1,000 1,002,887
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fac., Fin.
Auth. Rev.,
Pharmaceuticals, Ser. 83A, A.N.N.O.T. AAA(c) 3.80 12/01/96 2,000 2,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-112
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Revere Hsg. Auth. Multifamily Mtge. Rev., Waters Edge Apts.
Proj., Ser. 91C, F.R.W.D., F.S.A. A-1(c) 4.00% 9/06/96 $ 1,990 $ 1,990,000
-----------
Total Investments--96.7%
(cost $48,822,504;(e)) 48,822,504
Other assets in excess of liabilities--3.3% 1,688,908
-----------
Net Assets--100% $50,511,412
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.N.N.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).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Corporation.
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) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(e) 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-113
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilitie MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1996
<S> <C>
Investments, at amortized cost which approximates market value............................................ $48,822,504
Cash...................................................................................................... 83,642
Receivable for investments sold........................................................................... 3,748,179
Receivable for Series shares sold......................................................................... 446,889
Interest receivable....................................................................................... 274,359
Other assets.............................................................................................. 1,488
---------------
Total assets........................................................................................... 53,377,061
---------------
Liabilities
Payable for investments purchased......................................................................... 1,710,679
Payable for Series shares reacquired...................................................................... 1,055,065
Accrued expenses.......................................................................................... 63,707
Dividends payable......................................................................................... 25,098
Management fee payable.................................................................................... 5,460
Distribution fee payable.................................................................................. 2,940
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 2,865,649
---------------
Net Assets................................................................................................ $50,511,412
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 505,114
Paid-in capital in excess of par....................................................................... 50,006,298
---------------
Net assets, August 31, 1996............................................................................... $50,511,412
---------------
---------------
Net asset value, offering price and redemption price per share ($50,511,412 / 50,511,412 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)..................... $1.00
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-114
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................. $ 1,978,034
---------------
Expenses
Management fee........................... 273,444
Distribution fee......................... 68,361
Custodian's fees and expenses............ 60,000
Reports to shareholders.................. 32,000
Transfer agent's fees and expenses....... 25,000
Registration fees........................ 15,000
Amortization of organization expenses.... 11,150
Audit fees and expenses.................. 10,800
Legal fees and expenses.................. 5,000
Trustees' fees and expenses.............. 3,900
Insurance expense........................ 1,000
Miscellaneous............................ 2,148
---------------
Total expenses........................ 507,803
Less: Management fee waiver.............. (205,083)
Custodian fee credit.................. (6,728)
---------------
Net expenses.......................... 295,992
---------------
Net investment income....................... 1,682,042
---------------
Realized Loss on Investments
Net realized loss on investment
transactions............................. (130)
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 1,681,912
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income........ $ 1,682,042 $ 1,349,006
Net realized loss on
investment transactions... (130) (663)
--------------- ---------------
Net increase in net assets
resulting from
operations................ 1,681,912 1,348,343
--------------- ---------------
Dividends to shareholders (Note
1)........................... (1,681,912) (1,348,343)
--------------- ---------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold......................... 264,188,977 209,358,640
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 1,637,636 1,276,924
Cost of shares reacquired.... (272,137,014) (191,091,855)
--------------- ---------------
Net increase (decrease) in
net assets from Series
share transactions........ (6,310,401) 19,543,709
--------------- ---------------
Total increase (decrease)....... (6,310,401) 19,543,709
Net Assets
Beginning of year............... 56,821,813 37,278,104
--------------- ---------------
End of year..................... $ 50,511,412 $ 56,821,813
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-115
<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
fourteen 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 Net 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.The Fund amortizes premiums and accretes original issue discount
on portfolio securities as adjustments to interest income. Expenses are recorded
on the accrual basis which may require the use of certain estimates by
management.
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, 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 was deferred and
amortized over the period of 60 months ended July 1996.
Custody Fee Credits: The Fund 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 LLC.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. For the year
ended August 31, 1996, PMF voluntarily waived 75% of its management fee. The
amount of fees waived for the year ended August 31, 1996 amounted to $205,083
($.004 per share; .375% of average net assets).
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Fund through January 1,
1996. Effective January 2, 1996, Prudential Securities Incorporated (``PSI'')
became the distributor of the Fund and is serving the Fund under the same terms
and conditions as under the arrangement with PMFD. The Series reimbursed PMFD
and PSI for distributing and servicing the Series' shares pursuant to the plan
of distribution at an annual rate of .125 of 1% of the Series' average daily net
assets. The distribution fee is accrued daily and payable monthly.
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, 1996,
the Series incurred fees of approximately $22,800 for the services of PMFS. As
of August 31, 1996, approximately $1,800 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.
- --------------------------------------------------------------------------------
B-116
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <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
Net investment income and realized gains(a).................... .031 .031 .019 .021 .034
Dividends and distributions to shareholders.................... (.031) (.031) (.019) (.021) (.034)
------- ------- ------- ------- -------
Net asset value, end of year................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):............................................... 3.12% 3.10% 1.89% 2.17% 3.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).................................. $50,511 $56,822 $37,278 $36,608 $18,019
Average net assets (000)....................................... $54,689 $42,919 $42,427 $32,246 $15,477
Ratios to average net assets:(a)
Expenses, including distribution fees....................... .554% .627% .620% .365% .125%
Expenses, excluding distribution fees....................... .429% .502% .495% .240% .00%
Net investment income....................................... 3.08% 3.14% 1.86% 2.11% 3.20%
</TABLE>
- ---------------
(a) Net of management fee waiver and/or expense subsidy.
(b) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-117
<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, 1996, 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1996
B-118
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--96.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Adams Twnshp. Michigan Sch. Dist. Gen. Oblig., A.M.B.A.C. Aaa 6.60% 5/01/24 $ 1,000 $ 1,076,300
Avondale Michigan Sch. Dist., A.M.B.A.C.
Oakland Cnty., Gen. Oblig. Aaa 5.75 5/01/14 665 659,121
Oakland Cnty., Gen. Oblig. Aaa 5.80 5/01/15 525 521,168
Oakland Cnty., Gen. Oblig. Aaa 5.80 5/01/16 550 544,225
Brandon Sch. Dist. Gen. Oblig., F.G.I.C.
Oakland & Lapeer Cnty. Aaa 5.70 5/01/12 1,155 1,152,528
Oakland & Lapeer Cnty. Aaa 5.875 5/01/26 1,310 1,296,258
Breitung Twnshp. Sch. Dist. Rev., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 261,878
Canton Charter Twnshp. Bldg. Auth.,
Wayne Cnty. Golf Course,
F.S.A. Aaa 4.75 1/01/12 450 405,787
F.S.A. Aaa 4.75 1/01/13 500 (e) 446,475
F.S.A. Aaa 4.75 1/01/14 500 438,565
F.S.A. Aaa 4.75 1/01/11 450 409,707
Central Michigan Univ. Rev. A 7.00 10/01/10 700 (f) 772,142
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A, F.S.A. Aaa 6.875 5/01/09 1,000 1,061,590
Detroit Sewage Disp. Rev., Ser. 1993 A, F.G.I.C. Aaa 7.476 7/01/23 1,000 (d) 898,750
Detroit St. Aid, Gen. Oblig. Baa 5.625 5/01/97 1,500 (f) 1,517,355
Detroit Wtr. Supply Sys. Rev.,
F.G.I.C. Aaa 4.75 7/01/19 1,000 853,330
Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 989,540
Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,056,830
East Detroit Michigan Sch. Dist. Rfdg., F.G.I.C. Aaa 6.625 5/01/07 1,600 1,783,376
Ferris St. Univ. Gen. Rev., A.M.B.A.C. Aaa 5.80 10/01/05 440 462,088
Grand Ledge Public Sch. Dist., M.B.I.A. Aaa 5.375 5/01/24 1,480 1,384,066
Grand Rapids San. Swr. Sys. Rev. A1 7.00 1/01/16 500 537,375
Guam Pwr. Auth. Rev., Ser. A BBB(c) 6.625 10/01/14 1,000 1,020,180
Holland Sch. Dist., A.M.B.A.C. Aaa Zero 5/01/15 2,400 783,072
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 (e) 1,604,050
Kent Hosp. Fac. Fin. Auth. Rev., Blodgette Mem. Med. Ctr.,
Ser. A A 7.25 7/01/05 500 530,965
Kirtland Comm. College Dist., Gen. Oblig., M.B.I.A. Aaa 4.625 5/01/16 1,025 881,480
Lincoln Park Michigan Sch. Dist.,
F.G.I.C Aaa 7.00 5/01/20 1,500 1,663,800
F.G.I.C. Aaa 5.90 5/01/26 750 745,762
Mason Public Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 5.40 5/01/21 2,000 1,883,080
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-119
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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 Higher Ed., Student Loan Auth. Rev., Ser. XIII-A,
M.B.I.A. Aaa 7.55% 10/01/08 $ 500 $ 509,215
Michigan Pub. Pwr. Agcy. Rev., Belle River Proj., Ser. A A1 5.00 1/01/19 1,000 881,110
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A Baa1 8.25 7/01/12 2,000 2,132,940
Henry Ford Hosp. Aaa 9.00 5/01/08 2,340 (f) 3,015,792
Hosp. Genesys Hlth. Baa 8.125 10/01/21 1,000 1,092,380
Hosp. Genesys Hlth. Baa 7.50 10/01/27 500 519,960
Michigan St. Hsg. Dev. Auth. Rev.,
Multifamily Mtge. Insured Hsg., Ser. A A+(c) 7.15 4/01/10 810 845,989
Multifamily Mtge. Insured Hsg., Ser. A A+(c) 7.70 4/01/23 500 528,405
Sngl. Fam. Mtge., Ser. A AA+(c) 7.70 12/01/16 370 375,879
Michigan St. Strategic Fund Ltd. Obligated Rev.,
Waste Mgmt. Inc. Proj., A1 6.625 12/01/12 2,000 2,132,420
Michigan St. Trunk Line Hwy.,
Ser. A, A.M.B.A.C. Aaa Zero 10/01/05 2,600 1,610,726
Ser. A, A.M.B.A.C. Aaa Zero 10/01/06 1,250 727,450
Michigan St. Underground Storage Tank Fin. Assurance Auth.
Rev., A.M.B.A.C. Aaa 6.00 5/01/06 2,000 (e) 2,117,100
Michigan St. Univ. Rev., Ser. A, A.M.B.A.C. Aaa 5.125 2/15/16 1,000 (e) 922,950
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., F.G.I.C. Aaa 7.65 9/01/20 2,000 (e) 2,200,720
Mt. Pleasant Wtr. Rev., Wtr. & Swr.,
M.B.I.A. Aaa 5.00 2/01/22 520 459,368
M.B.I.A Aaa 4.00 2/01/23 550 410,382
M.B.I.A Aaa 4.00 2/01/24 585 434,199
Oak Park, Gen. Oblig.,
A.M.B.A.C. Aaa 7.00 5/01/11 375 (f) 420,188
A.M.B.A.C. Aaa 7.00 5/01/12 400 (f) 448,200
Posen Cons. Sch. Dist., Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000 e)(f) 1,114,950
Puerto Rico Commonwlth. Hwy. Auth. Rev., Ser. Q AAA(c) 7.75 7/01/16 1,500 e)(f) 1,697,430
Puerto Rico Commonwlth. Gen. Oblig., M.B.I.A. Aaa 7.887 7/01/08 1,000 (d) 1,043,750
Puerto Rico Elec. Pwr. Auth. Rev., Ser. N Baa1 7.125 7/01/14 920 989,846
Puerto Rico Ind. Tourist Edu., Med. & Envir. Ctrl. Facs.,
M.B.I.A. Aaa 6.25 7/01/24 1,000 1,035,310
St. Clair Cnty., Wtr. Supply Sys. No. VII, IRA Township,
A.M.B.A.C. Aaa 5.25 7/01/15 1,000 940,660
Univ. of Michigan Rev.,
Pkg. Sys. Rfdg. Aa1 5.00 6/01/15 500 450,890
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 500 521,490
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-120
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ------------------------------------------------------------------------------------------------------------------------------
Wayne Cnty. Bldg. Auth., Ser. A Baa 8.00% 3/01/17 $ 1,250 (f) $ 1,450,800
Western Michigan Univ. Gen. Rev., F.G.I.C. Aaa 5.00 7/15/21 500 439,290
Wyandotte Elec. Rev., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,167,860
-----------
Total long-term investments (cost $58,607,375) 61,278,492
SHORT-TERM INVESTMENTS--0.2%
Midland Cnty. Econ. Dev. Auth., Dow Chemical Co. Proj.,
F.R.D.D., Ser. 93A P1 3.90 9/03/96 100 100,000
-----------
Total short-term investments (cost $100,000) 100,000
-----------
Total Investments--96.2%
(cost $ 58,707,375; Note 4) 61,378,492
Other assets in excess of liabilities--3.8% 2,434,888
-----------
Net Assets--100% $63,813,380
-----------
-----------
</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 (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Corporation.
(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.
(f) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-121
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1996
Investments, at value (cost $58,707,375)................................................................... $61,378,492
Cash....................................................................................................... 49,780
Receivable for investments sold............................................................................ 1,515,490
Interest receivable........................................................................................ 1,008,208
Receivable for Series shares sold.......................................................................... 30,201
Due from broker - variation margin......................................................................... 16,250
Other assets............................................................................................... 1,944
---------------
Total assets............................................................................................ 64,000,365
---------------
Liabilities
Accrued expenses........................................................................................... 69,930
Dividends payable.......................................................................................... 51,301
Management fee payable..................................................................................... 24,617
Payable for Series shares reacquired....................................................................... 20,908
Distribution fee payable................................................................................... 17,529
Deferred trustees' fees.................................................................................... 2,700
---------------
Total liabilities....................................................................................... 186,985
---------------
Net Assets................................................................................................. $63,813,380
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................... $ 54,483
Paid-in capital in excess of par........................................................................ 61,024,390
---------------
61,078,873
Accumulated net realized gain on investments............................................................ 30,452
Net unrealized appreciation on investments.............................................................. 2,704,055
---------------
Net assets, August 31, 1996................................................................................ $63,813,380
---------------
---------------
Class A:
Net asset value and redemption price per share
($28,730,162 / 2,451,978 shares of beneficial interest issued and outstanding)....................... $11.72
Maximum sales charge (3% of offering price)............................................................. .36
---------------
Maximum offering price to public........................................................................ $12.08
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($34,970,785 / 2,986,735 shares of beneficial interest issued and outstanding)....................... $11.71
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($112,433 / 9,602 shares of beneficial interest issued and outstanding).............................. $11.71
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-122
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................. $ 4,079,632
---------------
Expenses
Management fee........................... 335,620
Distribution fee--Class A................ 27,978
Distribution fee--Class B................ 195,258
Distribution fee--Class C................ 711
Custodian's fees and expenses............ 76,000
Reports to shareholders.................. 49,000
Transfer agent's fees and expenses....... 49,000
Registration fees........................ 36,500
Audit fees and expenses.................. 12,300
Legal fees and expenses.................. 10,000
Trustees' fees and expenses.............. 3,900
Miscellaneous............................ 5,398
---------------
Total expenses........................ 801,665
Less: Management fee waiver.............. (33,562)
Custodian fee credit................. (5,696)
---------------
Net expenses.......................... 762,407
---------------
Net investment income....................... 3,317,225
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.................. 208,633
Financial futures contract
transactions.......................... 90,102
---------------
298,735
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. (441,660)
Financial futures contracts.............. 50,438
---------------
(391,222)
---------------
Net loss on investments..................... (92,487)
---------------
>Net Increase in Net Assets
Resulting from Operations................... $ 3,224,738
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income......... $ 3,317,225 $ 3,534,666
Net realized gain on
investment transactions.... 298,735 845,031
Net change in unrealized
depreciation of
investments................ (391,222) (108,362)
------------ ------------
Net increase in net assets
resulting from
operations................. 3,224,738 4,271,335
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A.................... (1,448,506) (898,307)
Class B.................... (1,864,426) (2,633,512)
Class C.................... (4,293) (2,847)
------------ ------------
(3,317,225) (3,534,666)
------------ ------------
Distributions from net
realized gains
Class A.................... (352,642) (12,146)
Class B.................... (514,059) (177,027)
Class C.................... (412) (43)
------------ ------------
(867,113) (189,216)
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold....................... 2,574,979 4,796,012
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 2,652,668 2,351,573
Cost of shares reacquired..... (9,038,280) (13,930,082)
------------ ------------
Net decrease in net assets
from Series share
transactions............... (3,810,633) (6,782,497)
------------ ------------
Total decrease................... (4,770,233) (6,235,044)
Net Assets
Beginning of year................ 68,583,613 74,818,657
------------ ------------
End of year...................... $ 63,813,380 $ 68,583,613
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-123
<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
fourteen 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.
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, 1996.
Securities Transactions and Net 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 accretes original issue
discount on portfolio securities as adjustments to interest income. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
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.
- --------------------------------------------------------------------------------
B-124
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
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
consist 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.
Custody Fee Credits: The Fund 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 LLC.
(``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. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $33,562 ($0.006 per share for Class A, B and C
shares; .05% of average net assets) until further notice. The Series is not
required to reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI''), became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI has advised the Series that it has received approximately $10,900
in front-end sales charges resulting from sales of Class A shares during the
fiscal year ended August 31, 1996. From these fees, PMFD and PSI paid such sales
charges to 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, 1996, it
received approximately $73,900 in contingent deferred sales charges imposed upon
certain redemptions by Class B shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other 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, 1996, the Series incurred fees of approximately $36,700 for the services of
PMFS. As of August 31, 1996, approximately $2,900 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1996 were $23,145,382 and
$28,297,922, respectively.
- --------------------------------------------------------------------------------
B-125
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
At August 31, 1996, the Fund sold 20 financial futures contracts on U.S.
Treasury Bonds which expire in September 1996. The value at disposition of such
contracts is $2,179,188. The value of such contracts on August 31, 1996 was
$2,146,250, thereby resulting in an unrealized gain of $32,938.
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,
1996, net unrealized appreciation for federal income tax purposes was $2,671,117
(gross unrealized appreciation--$3,032,975; gross unrealized
depreciation--$361,858).
- ------------------------------------------------------------
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. A special exchange privilege is also available for
shareholders who qualify 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 52,406 $ 620,873
Shares issued in reinvestment of
dividends
and distributions................. 94,877 1,134,847
Shares reacquired................... (308,633) (3,671,352)
---------- ------------
Net decrease in shares outstanding
before conversion................. (161,350) (1,915,632)
Shares issued upon conversion from
Class B........................... 339,773 4,040,498
---------- ------------
Net increase in shares
outstanding....................... 178,423 $ 2,124,866
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
Class B
- ------------------------------------
Year ended August 31, 1996:
Shares sold......................... 153,896 $ 1,841,004
Shares issued in reinvestment of
dividends
and distributions................. 126,423 1,513,838
Shares reacquired................... (444,092) (5,262,595)
---------- ------------
Net decrease in shares outstanding
before conversion................. (163,773) (1,907,753)
Shares reacquired upon conversion
into Class A...................... (339,981) (4,040,498)
---------- ------------
Net decrease in shares
outstanding....................... (503,754) $ (5,948,251)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
Class C
- ------------------------------------
Year ended August 31, 1996:
Shares sold......................... 9,428 $ 113,102
Shares issued in reinvestment of
dividends
and distributions................. 334 3,983
Shares reacquired................... (8,567) (104,333)
---------- ------------
Net increase in shares
outstanding....................... 1,195 $ 12,752
---------- ------------
---------- ------------
Year ended August 31, 1995:
Shares sold......................... 8,149 $ 93,001
Shares issued in reinvestment of
dividends and distributions....... 241 2,836
---------- ------------
Increase in shares outstanding...... 8,390 $ 95,837
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-126
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
Year Ended August 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.89 $ 11.75 $12.51 $11.90 $11.30
------- ------- ------ ------ ------
Income from investment operations
Net investment income................ .62(a) .64(a) .64 .67 .68
Net realized and unrealized gain
(loss) on investment
transactions...................... (.02) .17 (.69) .71 .60
------- ------- ------ ------ ------
Total from investment
operations..................... .60 .81 (.05) 1.38 1.28
------- ------- ------ ------ ------
Less distributions
Dividends from net investment
income............................ (.62) (.64) (.64) (.67) (.68)
Distributions from net realized
gains............................. (.15) (.03) (.07) (.10) --
------- ------- ------ ------ ------
Total distributions............... (.77) (.67) (.71) (.77) (.68)
------- ------- ------ ------ ------
Net asset value, end of year......... $ 11.72 $ 11.89 $11.75 $12.51 $11.90
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):..................... 5.07% 7.13% (0.38)% 11.95% 11.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $28,730 $27,024 $4,706 $3,814 $1,618
Average net assets (000)............. $27,978 $16,932 $4,505 $2,285 $1,235
Ratios to average net assets:
Expenses, including distribution
fees........................... .91%(a) 1.02%(a) .91% .96% .98%
Expenses, excluding distribution
fees........................... .81%(a) .92%(a) .81% .86% .88%
Net investment income............. 5.18%(a) 5.31%(a) 5.27% 5.51% 5.82%
Portfolio turnover rate.............. 36% 33% 12% 14% 30%
</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-127
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------------
----------------------------------------------------------
Year Ended August
Year Ended August 31, 31,
---------------------------------------------------------- ------------------
1996 1995 1994 1993 1992 1996 1995
------- ------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.88 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 11.88 $11.75
------- ------- ------- ------- ------- ------- ------
Income from investment operations
Net investment income................ .57(a) .59(a) .59 .62 .63 .54(a) .56(a)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.02) .16 (.69) .71 .60 (.02) .16
------- ------- ------- ------- ------- ------- ------
Total from investment
operations..................... .55 .75 (.10) 1.33 1.23 .52 .72
------- ------- ------- ------- ------- ------- ------
Less distributions
Dividends from net investment
income............................ (.57) (.59) (.59) (.62) (.63) (.54) (.56)
Distributions from net realized
gains............................. (.15) (.03) (.07) (.10) -- (.15) (.03)
------- ------- ------- ------- ------- ------- ------
Total distributions............... (.72) (.62) (.66) (.72) (.63) (.69) (.59)
------- ------- ------- ------- ------- ------- ------
Net asset value, end of period....... $ 11.71 $ 11.88 $ 11.75 $ 12.51 $ 11.90 $ 11.71 $11.88
------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------
TOTAL RETURN(b):..................... 4.66% 6.60% (0.78)% 11.51% 11.18% 4.39% 6.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $34,971 $41,459 $70,112 $70,302 $56,095 $112 $100
Average net assets (000)............. $39,052 $52,216 $72,095 $61,548 $52,137 $95 $61
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.31%(a) 1.37%(a) 1.31% 1.36% 1.38% 1.56%(a) 1.68%(a)
Expenses, excluding distribution
fees........................... .81%(a) .87%(a) .81% .86% .88% .81%(a) .93%(a)
Net investment income............. 4.77%(a) 5.04%(a) 4.87% 5.11% 5.42% 4.53%(a) 4.66%(a)
Portfolio turnover rate.............. 36% 33% 12% 14% 30% 36% 33%
<CAPTION>
August 1,
1994(d)
through
August 31,
1994
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $11.78
-----
Income from investment operations
Net investment income................ .04
Net realized and unrealized 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....... $11.75
-----
-----
TOTAL RETURN(b):..................... 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $200(e)
Average net assets (000)............. $199(e)
Ratios to average net assets:
Expenses, including distribution
fees........................... 2.15%(c)
Expenses, excluding distribution
fees........................... 1.39%(c)
Net investment income............. 4.56%(c)
Portfolio turnover rate.............. 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-128
<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, 1996, 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1996
B-129
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--97.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Atlantic City Mun. Utils. Auth. Rev., Wtr. Sys. A-(c) 7.75% 5/01/17 $2,000 (e) $2,236,940
Atlantic City, Gen. Oblig., Ser. A Baa1 Zero 11/01/06 1,490 875,301
Bergen Cnty., Utils. Auth., Wtr. Poll. Ctrl. Rev., Ser. B,
F.G.I.C. Aaa 5.75 12/15/05 1,000 1,053,590
Camden Cnty. Mun. Utility Auth. Ref., F.G.I.C. Aaa 6.00 7/15/06 2,500 2,658,725
Cape May Cnty. Ind. Poll. Ctrl., Fin. Auth. Rev., M.B.I.A. Aaa 6.80 3/01/21 2,615 2,988,527
Cinnaminson Sewage Auth. Rev. NR 7.40 2/01/15 1,600(e) 1,769,392
Edison Twnshp., Gen. Oblig., A.M.B.A.C. Aaa 6.00 1/01/08 5,390(e) 5,736,361
Egg Harbor Twnshp. Sch. Dist., Cert. of Part., M.B.I.A. Aaa 7.40 4/01/02 1,000 1,090,390
Egg Harbor Twnshp. Sch. Dist., F.S.A. Aaa 4.75 2/15/09 1,010 935,422
Essex Cnty. Ref., Ser. A-1, A.M.B.A.C. Aaa 5.375 9/01/10 2,500 2,451,825
Essex Cnty. Impvt. Auth., Ser. A, A.M.B.A.C. Aaa 5.50 9/01/15 3,800 3,682,504
Evesham Mun. Utils. Auth. Rev., Ser. B, M.B.I.A. Aaa 7.00 7/01/10 2,000 2,145,800
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/03 500 559,640
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/04 500 563,180
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/05 500 565,660
Hudson Cnty. Impvt. Auth., Solid Waste Sys. Rev. BBB-(c) 7.10 1/01/20 2,050 2,005,658
Hudson Cnty. Impvt. Auth., Solid Waste Sys. Rev. A+(c) 6.10 7/01/20 1,500 1,507,560
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/04 1,020 1,128,283
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/05 940 1,043,081
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/10 1,600 1,782,864
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/11 1,600 1,782,992
Jersey City,
Gen. Oblig., A.M.B.A.C. Aaa 6.00 10/01/09 2,000(f) 2,113,380
Gen. Oblig., A.M.B.A.C. Aaa 6.00 10/01/10 2,760(f) 2,904,983
Gen. Oblig., Ser. A, F.S.A. Aaa 9.25 5/15/04 4,310 5,476,243
Lakewood Twnshp., Gen. Oblig., F.G.I.C. Aaa 6.60 12/01/04 450 501,570
Lakewood Twnshp., Gen. Oblig., F.G.I.C. Aaa 6.60 12/01/05 445 497,394
Lenape Regl. High Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 7.625 1/01/12 400 485,892
Mercer Cnty. Impvt. Auth. Rev. Aa1 Zero 4/01/06 2,500 1,525,500
Middle Twnshp. Sch. Dist., F.G.I.C. Aaa 7.00 7/15/05 1,200 1,363,788
Middlesex Cnty. New Jersey Utils. Auth. Sewer Rev.
Refunding Ser. A, F.G.I.C. Aaa 5.375 9/15/15 2,250 2,170,710
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/13 1,140 1,106,894
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/14 1,135 1,102,130
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/16 1,150 1,109,037
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/17 1,150 1,106,312
Monmouth Cnty. Impvt. Auth. Rev. AA(c) 6.55 7/01/12 4,065 4,372,517
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-130
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Monmouth Cnty. Impvt. Auth. Rev.,
Govt. Loan, F.S.A. Aaa 5.25% 7/15/08 $1,900 $1,880,050
Govt. Loan, F.S.A. Aaa 5.35 7/15/10 1,980 1,947,152
Water & Sewage Facs. Rev., M.B.I.A. Aaa 5.00 2/01/13 1,600 1,481,520
Wtr. Treatment Fac., M.B.I.A. Aaa 6.875 8/01/12 750 822,787
Morris Cnty. Gen'l. Impt. & Park Aaa 5.00 7/15/14 3,180 2,942,358
Morris Cnty. Gen'l. Impt. & Park Aaa 5.00 7/15/15 3,180 2,917,555
New Jersey Bldg. Auth. Rev., Garden St. Svg. Bonds, Ser. A Aa Zero 6/15/03 890 636,813
New Jersey Econ. Dev. Auth Wtr. Fac. Rev. F.G.I.C NR 7.966 11/01/29 5,000 4,725,000
New Jersey Econ. Dev. Auth. Rev.,
Clara Maas Health Sys. Project, F.S.A. Aaa 5.00 7/01/25 3,365 2,977,015
Ed. Testing Service, Ser. B, M.B.I.A. Aaa 5.90 5/15/15 2,000 2,004,520
Ed. Testing Service, Ser. B, M.B.I.A. Aaa 6.25 5/15/25 5,000 5,181,100
Nat'l. Assoc. of Accountants NR 7.50 7/01/01 1,050 1,094,163
Nat'l. Assoc. of Accountants NR 7.65 7/01/09 950 991,069
New Jersey Performing Arts Center Proj., Ser. C,
A.M.B.A.C. Aaa 5.00 6/15/15 3,320 3,004,069
New Jersey Performing Arts Center Proj., Ser. C,
A.M.B.A.C. Aaa 5.00 6/15/16 3,485 3,153,716
New Jersey Econ. Dist. Heating & Cool., Trigen Trenton
Proj. BBB-(c) 6.20 12/01/10 600 597,798
New Jersey Edl. Facs. Auth. Rev.,
Higher Educ. Facs. Trust Fund, Ser. A, A.M.B.A.C. Aaa 5.125 9/01/10 1,200 1,153,164
New Jersy Inst. of Tech., Ser. E, M.B.I.A. Aaa 5.375 7/01/20 4,860 4,594,595
Princeton Theological, Ser. B Aaa 5.90 7/01/26 4,500 4,514,805
Princeton Univ. Inst. For Adv. Study, Ser. B Aaa 6.35 7/01/21 5,620 5,805,179
Seton Hall Univ. Proj., Ser. D Baa1 7.00 7/01/21 2,000 2,083,320
Trenton State College, Ser. A, M.B.I.A. Aaa 5.00 7/01/16 3,450 3,153,507
Univ. of Medicine & Dentistry, Ser. B, A.M.B.A.C. Aaa 5.25 12/01/15 1,500 1,419,900
Univ. of Medicine & Dentistry, Ser. B, A.M.B.A.C. Aaa 5.25 12/01/21 3,150 2,921,499
Univ. of Medicine & Dentistry, Ser. B, A.M.B.A.C. Aaa 5.25 12/01/25 1,000 924,200
New Jersey Hlth. Care Facs. Fin. Auth. Rev.,
Atlantic City Med. Ctr., Ser. C. A 6.80 7/01/11 2,500 2,668,100
East Orange Gen. Hosp., Ser. B BBB+(c) 7.75 7/01/20 2,250 2,375,370
Helene Fuld Med. Ctr., Ser. C A(c) 8.00 7/01/08 2,700 2,878,632
Helene Fuld Med. Ctr., Ser. C A(c) 8.125 7/01/13 500 534,160
Intercare Hlth. Systems-JFK Ctr. A 7.50 7/01/07 1,000 1,055,530
Intercare Hlth. Systems-JFK Ctr. A 7.625 7/01/18 945 999,517
Jersey Shore Med. Ctr., A.M.B.A.C. Aaa 6.00 7/01/09 1,465 1,525,592
Jersey Shore Med. Ctr., A.M.B.A.C. Aaa 6.25 7/01/21 1,500 1,546,515
Kensington Cmnty. Med. Ctr., M.B.I.A. Aaa 7.00 7/01/20 3,450 3,723,551
Rahway Hospital, Ser. B Baa1 7.75 7/01/14 4,740 4,945,858
Robert Wood Johnson Univ., Ser. C, M.B.I.A. Aaa 5.25 7/01/10 2,935 2,823,089
St. Joseph's Hosp. Med. Ctr., Ser. A AAA(c) 5.70 7/01/11 4,375 4,294,806
Warren Hosp. AA(c) 5.25 7/01/14 2,985 2,729,394
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-131
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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. Hsg. & Mtge. Fin. Agcy.,
Ser. D, M.B.I.A. Aaa 7.70% 10/01/29 $3,915 $4,063,026
Rental Housing, Ser. B A+(c) 6.75 11/01/11 2,190 2,261,175
New Jersey St. Hwy. Auth., Garden St. Pkwy. Gen. Rev., A1 6.20 1/01/10 3,035 3,245,508
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A Aaa 6.50 1/01/09 1,000 1,098,990
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A Aaa 6.50 1/01/16 5,835 6,355,540
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser.
A, M.B.I.A. Aaa 6.00 12/15/06 5,000 5,348,150
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser.
A, M.B.I.A. Aaa 5.00 6/15/15 2,000 1,841,800
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser.
B, M.B.I.A. Aaa 6.50 6/15/11 5,000 5,522,550
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser.
B, M.B.I.A. Aaa 5.75 6/15/14 5,000 4,912,150
North Brunswick Twnshp.,
Brd. of Ed., Gen. Oblig. Aa(c) 6.80 6/15/06 350 396,536
Brd. of Ed., Gen. Oblig. Aa(c) 6.80 6/15/07 350 397,320
Gen. Oblig. Aa 6.40 5/15/10 545 585,025
Northfield Brd. of Ed., F.S.A Aaa 5.375 7/15/14 1,390 1,339,668
Northfield Brd. of Ed., F.S.A Aaa 5.375 7/15/15 1,470 1,406,908
Paterson Cnty., F.S.A. Aaa 6.50 2/15/05 2,000 2,168,940
Port Auth. New York & New Jersey, Ser. 100 A1 5.75 6/15/30 1,430 1,372,371
Port Auth. New York & New Jersey, Ser. 94 A1 5.80 12/01/13 2,500 2,470,250
Port Auth. New York & New Jersey, Ser. 96, F.G.I.C. Aaa 6.60 10/01/23 2,750 2,924,020
Puerto Rico Elec. Pwr. Auth. Rev. Baa1 6.00 7/01/12 3,295 3,310,322
Puerto Rico Elec. Pwr. Auth. Rev., Ser. R Baa1 6.25 7/01/17 2,800 2,832,508
Puerto Rico Elec. Pwr. Auth. Rev., Ser. S Baa1 6.125 7/01/08 2,300 2,438,046
Puerto Rico Hwy. Auth. Rev., Ser. R Baa1 6.75 7/01/05 1,000 (e) 1,091,540
Puerto Rico Hwy. Auth. Rev., Ser. S Baa1 6.50 7/01/22 750 829,155
Puerto Rico Ind. Tour. Edl. Hosp. Auxil., Mut. Oblig. Grp.
Proj., M.B.I.A. Aaa 6.25 7/01/24 3,000 3,105,930
Puerto Rico Public Bldgs. Auth. Rev., Guar. Gov't. Fac.,
Ser. A, A.M.B.A.C. Aaa 5.50 7/01/21 1,600 1,533,056
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.677 1/25/07 7,875 7,707,656
Rutgers St. Univ. Rev., Ser. A A1 6.40 5/01/13 2,000 2,169,460
Salem Cnty. New Jersey Indus. Poll. Ctrl. Fin. Auth. Rev.,
M.B.I.A. Aaa 5.55 11/01/33 1,250 1,175,363
South Brunswick Twnshp., Wtr. & Swr. Utils., Gen. Impvt., AA(c) 6.90 8/01/05 850 (e) 931,957
South Brunswick Twnshp., Wtr. & Swr. Utils., Gen. Impvt., AA(c) 6.90 8/01/06 850 (e) 931,957
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/13 1,300 1,207,518
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/14 1,300 1,197,469
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/15 1,230 1,123,322
Union City Sch. Impvt., F.S.A. Aaa 6.375 11/01/08 1,545 1,690,972
Union Cnty. Utils. Auth., Solid Waste Rev., Ser. A A-(c) 7.20 6/15/14 4,850 4,880,797
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 1,865 1,967,015
West Morris Regl. High Sch. Dist., Cert. of Part., B.I.G. Aaa 7.50 3/15/09 1,500 1,601,295
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-132
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ------------------------------------------------------------------------------------------------------------------------------
West New York & New Jersey Mun. Util. Auth. Swr. Rev.,
F.G.I.C. Aaa 5.125% 12/15/17 $2,050 $ 1,891,269
West Windsor Regional Sch. Dist., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,016,780
West Windsor Regional Sch. Dist., F.G.I.C. Aaa 5.50 12/01/13 2,600 2,557,126
West Windsor Regional Sch. Dist., F.G.I.C. Aaa 5.50 12/01/14 2,700 2,641,950
------------
Total long-term investments (cost $251,910,540) $256,969,403
------------
SHORT-TERM INVESTMENTS--3.9%
Port Auth. of New York & New Jersey,
Ser. 3, F.R.D.D. VMIG1 3.65 9/03/96 8,600 8,600,000
Ser. 4, F.R.D.D. VMIG1 3.80 9/03/96 1,800 1,800,000
------------
Total short-term investments (cost $10,400,000) $ 10,400,000
------------
Total Investments--101.0%
(cost $ 262,310,540; Note 4) 267,369,403
Liabilities in excess of other assets--(1.0)% (2,600,485)
------------
Net Assets--100% $264,768,918
------------
------------
</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.
(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) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(e) Indicates a when-issued security.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-133
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1996
Investments, at value (cost $262,310,540)................................................................. $ 267,369,403
Cash...................................................................................................... 9,357
Interest receivable....................................................................................... 3,429,885
Receivable for Series shares sold......................................................................... 58,899
Deferred expenses and other assets........................................................................ 8,351
---------------
Total assets........................................................................................... 270,875,895
---------------
Liabilities
Payable for investments purchased......................................................................... 5,080,969
Payable for Series shares reacquired...................................................................... 565,258
Dividends payable......................................................................................... 201,867
Management fee payable.................................................................................... 102,850
Distribution fee payable.................................................................................. 88,869
Accrued expenses and other liabilities.................................................................... 64,464
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 6,106,977
---------------
Net Assets................................................................................................ $ 264,768,918
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 243,581
Paid-in capital in excess of par....................................................................... 255,176,279
---------------
255,419,860
Accumulated net realized gain on investments........................................................... 4,290,195
Net unrealized appreciation on investments............................................................. 5,058,863
---------------
Net assets, August 31, 1996............................................................................... $ 264,768,918
---------------
---------------
Class A:
Net asset value and redemption price per share
($74,492,295 / 6,854,155 shares of beneficial interest issued and outstanding)...................... $10.87
Maximum sales charge (3.0% of offering price).......................................................... .34
---------------
Maximum offering price to public....................................................................... $11.21
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($188,315,307 / 17,323,497 shares of beneficial interest issued and outstanding).................... $10.87
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($1,961,316 / 180,427 shares of beneficial interest issued and outstanding)......................... $10.87
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-134
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................. $16,722,100
---------------
Expenses
Management fee........................... 1,429,531
Distribution fee--Class A................ 61,836
Distribution fee--Class B................ 1,111,674
Distribution fee--Class C................ 13,012
Reports to shareholders.................. 139,000
Custodian's fees and expenses............ 125,000
Transfer agent's fees and expenses....... 110,000
Registration fees........................ 61,000
Legal fees and expenses.................. 10,000
Audit fees and expenses.................. 12,300
Trustee's fees........................... 3,900
Miscellaneous............................ 2,760
---------------
Total expenses........................ 3,080,013
Less: Management fee waiver........... (266,868)
Custodian fee credit.............. (40,377)
---------------
Net expenses...................... 2,772,768
---------------
Net investment income....................... 13,949,332
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.................. 6,988,022
Financial futures transactions........... 134,325
Options written.......................... 74,270
---------------
7,196,617
---------------
Net change in unrealized
appreciation/depreciation on:
Investments.............................. (8,753,100)
Financial futures transactions........... 40,469
---------------
(8,712,631)
---------------
Net loss on investments..................... (1,516,014)
---------------
Net Increase in Net Assets
Resulting from Operations................... $12,433,318
---------------
---------------
</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 1996 1995
<S> <C> <C>
Operations
Net investment income...... $ 13,949,332 $ 16,331,296
Net realized gain on
investment
transactions............ 7,196,617 1,258,159
Net change in unrealized
appreciation/depreciation
of investments.......... (8,712,631) 1,997,149
----------------- ------------
Net increase in net assets
resulting from
operations.............. 12,433,318 19,586,604
----------------- ------------
Dividends and distributions (Note 1):
Dividends from net
investment income
Class A................. (3,208,681) (1,712,625)
Class B................. (10,661,812) (14,579,222)
Class C................. (78,839) (39,449)
----------------- ------------
(13,949,332) (16,331,296)
----------------- ------------
Distributions from net
realized gains
Class A................. (241,413) --
Class B................. (912,215) --
Class C................. (5,692) --
----------------- ------------
(1,159,320) --
----------------- ------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
sold.................... 12,763,152 18,110,094
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 9,004,603 9,760,545
Cost of shares
reacquired.............. (51,693,450) (71,846,422)
----------------- ------------
Net decrease in net assets
from Series share
transactions............ (29,925,695) (43,975,783)
----------------- ------------
Total decrease................ (32,601,029) (40,720,475)
Net Assets
Beginning of year............. 297,369,947 338,090,422
----------------- ------------
End of year................... $ 264,768,918 $297,369,947
----------------- ------------
----------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-135
<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
fourteen 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, 1996.
Securities Transactions and Net 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. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
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
- --------------------------------------------------------------------------------
B-136
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY 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.
Custody Fee Credits: The Fund 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 LLC.
(``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 subadvisor'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, 1995, PMF waived 35% of its management fee. For the
eight months ended August 31, 1996, PMF waived 10% of its management fee. The
amount of fees waived for the year ended August 31, 1996, amounted to $266,868
($0.019 per share for Class A, B and C shares; 0.09% of average net assets)
until further notice. The Series is not required to reimburse PMF for such
waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI''), became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI 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 PSI and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$16,300 in front-end sales charges resulting from sales of Class A shares during
the year ended August 31, 1996. From these fees, PMFD and PSI paid such sales
charges to affiliated broker-dealers which in turn paid commissions to sales
persons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1996, it received
approximately $383,900 and $2,200 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,
1996, the Series incurred fees of approximately $102,800 for the services of
PMFS. As of August 31, 1996, approximately $8,000 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-137
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1996, were $169,609,043 and
$204,222,142, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1996, was $262,322,690 and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was $5,046,713 (gross unrealized
appreciation--$7,959,214; gross unrealized depreciation--$2,912,501).
The Series utilized its capital loss carryforward of approximately $1,724,478 to
offset the Series net taxable gains realized and recognized in the fiscal year
ended August 31, 1996.
Transactions in written options during the period ended August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written...................... 330 74,270
Options expired...................... (330) (74,270)
--------- --------
Options outstanding at August 31,
1996............................... 0 0
--------- --------
--------- --------
</TABLE>
- ------------------------------------------------------------
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
will 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 qualify 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 148,515 $ 1,647,737
Shares issued in reinvestment
of dividends and distributions.... 190,011 2,098,434
Shares reacquired................... (1,234,733) (13,625,430)
---------- ------------
Net decrease in shares outstanding
before conversion................. (896,207) (9,879,259)
Shares issued upon conversion from
Class B........................... 3,227,199 35,525,116
---------- ------------
Net increase in shares
outstanding....................... 2,330,992 $ 25,645,857
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 917,780 $ 10,139,469
Shares issued in reinvestment
of dividends and distributions.... 617,603 6,835,852
Shares reacquired................... (3,405,389) (37,508,650)
---------- ------------
Net decrease in shares outstanding
before conversion................. (1,870,006) (20,533,329)
Shares reacquired upon conversion
into Class A...................... (3,227,199) (35,525,116)
---------- ------------
Net decrease in shares
outstanding....................... (5,097,205) $(56,058,445)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-138
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<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)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 88,262 $ 975,946
Shares issued in reinvestment
of dividends and distributions.... 6,369 70,317
Shares reacquired................... (51,020) (559,370)
---------- ------------
Net increase in shares
outstanding....................... 43,611 $ 486,893
---------- ------------
---------- ------------
Year 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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-139
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year......... $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73
------- ------- ------- ------- -------
Income from investment operations
Net investment income(a)................... .57 .61 .61 .64 .67
Net realized and unrealized gain (loss) on
investment transactions................. (.07) .17 (.75) .71 .51
------- ------- ------- ------- -------
Total from investment operations........ .50 .78 (.14) 1.35 1.18
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income....... (.57) (.61) (.61) (.64) (.67)
Distributions from net realized gains on
investment transactions................. (.04) -- (.18) (.12) (.09)
------- ------- ------- ------- -------
Total distributions..................... (.61) (.61) (.79) (.76) (.76)
------- ------- ------- ------- -------
Net asset value, end of year............... $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):........................... 4.63% 7.55% (1.27)% 12.57% 11.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).............. $74,492 $49,666 $14,774 $15,501 $11,941
Average net assets (000)................... $61,837 $30,290 $15,334 $13,444 $ 9,759
Ratios to average net assets:(a)
Expenses, including distribution fees... .67% .55% .58% .61% .48%
Expenses, excluding distribution fees... .57% .45% .48% .51% .38%
Net investment income................... 5.19% 5.65% 5.42% 5.63% 6.14%
Portfolio turnover rate.................... 62% 37% 34% 32% 38%
- ---------------
</TABLE>
(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-140
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------------ ---------------------
Year Ended August 31, Year Ended August 31,
------------------------------------------------------------ ---------------------
1996 1995 1994 1993 1992 1996 1995
-------- -------- -------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $10.98 $10.81
-------- -------- -------- -------- -------- ------ ------
Income from investment operations
Net investment income(a)................... .53 .57 .56 .59 .63 .50 .54
Net realized and unrealized gain (loss) on
investment transactions................. (.07) .17 (.75) .71 .51 (.07) .17
-------- -------- -------- -------- -------- ------ ------
Total from investment operations........ .46 .74 (.19) 1.30 1.14 .43 .71
-------- -------- -------- -------- -------- ------ ------
Less distributions
Dividends from net investment income....... (.53) (.57) (.56) (.59) (.63) (.50) (.54)
Distributions from net realized gains on
investment transactions................. (.04) -- (.18) (.12) (.09) (.04) --
-------- -------- -------- -------- -------- ------ ------
Total distributions..................... (.57) (.57) (.74) (.71) (.72) (.54) (.54)
-------- -------- -------- -------- -------- ------ ------
Net asset value, end of period............. $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15 $10.87 $10.98
-------- -------- -------- -------- -------- ------ ------
-------- -------- -------- -------- -------- ------ ------
TOTAL RETURN(b):........................... 4.22% 7.12% (1.67)% 12.12% 10.93% 3.96% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $188,315 $246,202 $323,077 $351,878 $295,781 $1,961 $1,502
Average net assets (000)................... $222,235 $274,995 $343,941 $316,372 $269,318 $1,735 $ 790
Ratios to average net assets:(a)
Expenses, including distribution fees... 1.07% .95% .98% 1.01% .88% 1.32% 1.20%
Expenses, excluding distribution fees... .57% .45% .48% .51% .38% .57% .45%
Net investment income................... 4.80% 5.30% 5.02% 5.23% 5.74% 4.54% 4.99%
Portfolio turnover rate.................... 62% 37% 34% 32% 38% 62% 37%
- ---------------
<CAPTION>
<S> <C>
August 1,
1994(d)
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>
(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-141
<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, 1996, 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, 1996 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other audit 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 Series, as of August 31, 1996, 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 14, 1996
B-142
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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 3.20% 9/04/96 $ 1,300 $ 1,300,000
Bergen Cnty., Ser. 96, G.O. Aaa 4.50 6/15/97 1,690 1,698,371
Bernards Twnshp., Ser. 96, B.A.N. NR 4.00 5/23/97 3,801 3,808,165
Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec.
Co., Ser. 95C, F.R.D.D. VMIG1 4.00 9/03/96 2,000 2,000,000
Essex Cnty. Impvt. Auth. Rev., F.R.W.D. VMIG1 3.00 9/04/96 4,000 4,000,000
Gloucester Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev.,
Monsanto Co. Proj., Ser. 92, F.R.W.D. P-1 3.20 9/04/96 3,120 3,120,000
Hudson Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D. A-1(c) 3.50 9/05/96 4,445 4,445,000
Jersey City, B.A.N. P-1 4.25 9/27/96 7,000 7,001,970
Morris Cnty., B.A.N. VMIG1 3.95 8/07/97 7,000 7,001,831
New Jersey Sports & Expo. Auth., Ser. 92C, F.R.W.D.,
M.B.I.A. VMIG1 3.15 9/05/96 4,300 4,300,000
New Jersey St. Econ. Dev. Auth.,
Brach Jersey Ave, Ser. 86, F.R.W.D. P-1 3.30 9/04/96 2,200 2,200,000
Catholic Cmnty. Svcs Proj., Ser. 93, F.R.W.D. VMIG1 3.35 9/05/96 5,900 5,900,000
Catholic Cmnty. Svcs Proj., Ser. 95, F.R.W.D. VMIG1 3.35 9/05/96 2,500 2,500,000
Chambers Cogen. Ltd., Ser. 91, T.E.C.P. VMIG1 3.50 10/25/96 3,000 3,000,000
Chambers Cogen. Ltd., Ser. 91, T.E.C.P. VMIG1 3.50 12/16/96 4,400 4,400,000
East Meadow Corp., Ser. 86A, F.R.W.D. VMIG1 3.60 9/04/96 2,675 2,675,000
Econ. Growth Bds., Ser. 94B, F.R.W.D. A-1(c) 3.25 9/05/96 1,800 1,800,000
Franciscan Oaks Proj., Ser. 92B, F.R.W.D. A-1+(c) 3.30 9/04/96 1,600 1,600,000
Hillcrest Health Svcs. Sys. Proj., Ser. 95, F.R.W.D. P-1 3.40 9/04/96 8,000 8,000,000
Hoffman La-Roche Inc. Proj., Ser. 93, F.R.D.D. Aaa 3.60 9/03/96 6,800 6,800,000
Kent Place, Ser. 92L, F.R.W.D. VMIG1 3.40 9/05/96 1,930 1,930,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.55 9/20/96 2,360 2,360,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.55 10/24/96 2,600 2,600,000
Keystone Proj., Ser. 92, T.E.C.P. VMIG1 3.50 12/17/96 1,500 1,500,000
Michael Shalit Proj., Ser. 93, F.R.D.D. P-1 3.80 9/03/96 1,700 1,700,000
North Plainfield Hldg., Ser. 92, A.O.T. VMIG1 4.00 9/01/97 3,635 3,635,000
Ocean Spray Cranberry Inc. Proj., Ser. 87, S.A.O.T. A+(c)(e) 4.10 7/01/97 4,000 4,000,000
Office Court Assoc. Proj., F.R.W.D. A-1+(c) 3.45 9/04/96 1,800 1,800,000
Peddie Sch. Proj., Ser. 94B, F.R.W.D. A-1(c) 3.25 9/05/96 3,000 3,000,000
RJB Associates Ltd., F.R.W.D. A-1(c) 3.50 9/05/96 1,480 1,480,000
Russ Berrie & Co., Ser. 83, F.R.W.D. A-1+(c) 3.15 9/04/96 200 200,000
Thermal Energy Ltd., Ser. 95, S.A.O.T. NR 3.60 12/12/96 2,500 2,500,000
Volvo America Corp, Ser. 84, F.R.W.D. A-1+(c) 4.015 9/04/96 1,500 1,500,000
New Jersey St. Hsg. Fin. Agcy., Ser. 92A, Q.T.P.O.T. AA+(c) 3.75 11/01/96 3,000 3,000,000
New Jersey St. Tpke. Auth. Rev., Ser. D, F.R.W.D.,
F.G.I.C. VMIG1 3.00 9/04/96 3,000 3,000,000
Newark Healthcare Facs. Rev., Ser. 95A, F.R.W.D. A-1(c) 3.60 9/05/96 2,955 2,955,000
Ocean Cnty., Ser. 96, B.A.N. VMIG1 4.10 7/01/97 3,000 3,008,544
Piscataway Twnshp., Ser. 96, B.A.N. NR 4.25 4/25/97 3,000 3,012,157
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-143
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Port Auth. of New York & New Jersey,
Ser. 93, F.R.D.D. VMIG1 3.65% 9/03/96 $ 5,000 $ 5,000,000
Ser. 93-2, F.R.W.D. P-1 3.441 9/03/96 8,000 8,000,000
Ser. 94, F.R.D.D. VMIG1 3.80 9/03/96 4,200 4,200,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank, Ser. 85, F.R.W.D. VMIG1 3.10 9/04/96 400 400,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P. A-1+(c) 3.35 9/12/96 1,300 1,300,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P. A-1+(c) 3.45 9/12/96 2,500 2,500,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P. A-1+(c) 3.60 10/07/96 4,000 4,000,000
Randolph Twnshp., B.A.N. NR 4.25 9/06/96 3,593 3,592,642
Roxbury Twnshp., Ser. 96, B.A.N. NR 3.75 2/14/97 7,798 7,815,067
Salem Cnty. Ind. Poll. Ctrl. Rev., Ser. 93A, T.E.C.P. VMIG1 3.50 12/17/96 8,000 8,000,000
Sussex Cnty., B.A.N. NR 4.50 9/13/96 5,000 5,000,945
Washington Twnshp., Ser. 96, B.A.N. NR 3.50 10/21/96 5,334 5,335,064
West Orange Twnshp., B.A.N. NR 3.75 10/03/96 3,951 3,951,843
Woodbridge., Ser. 96, T.A.N. NR 3.43 2/13/97 1,250 1,248,504
------------
Total Investments--99.8%
(amortized cost $181,075,103; (d)) 181,075,103
Other assets in excess of liabilities--0.2% 321,190
------------
Net Assets--100% $181,396,293
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Corp.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
G.O.--General Obligation.
M.B.I.A.--Municipal Bond Investors Assurance.
Q.T.P.O.T.--Quarterly Third Party Optional Tender.
S.A.O.T.--Semi-Annual Optional Tender.
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.
(e) This security has been deemed comparable in quality to an eligible
investment.
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-144
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1996
---------------
<S> <C>
Investments, at amortized cost which approximates market value............................................ $ 181,075,103
Interest receivable....................................................................................... 1,521,811
Receivable for Series shares sold......................................................................... 1,010,016
Receivable for investments sold........................................................................... 245,000
Deferred expenses and other assets........................................................................ 5,318
---------------
Total assets........................................................................................... 183,857,248
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 2,198,593
Accrued expenses and other liabilities.................................................................... 87,001
Dividends payable......................................................................................... 84,560
Management fee payable.................................................................................... 77,411
Distribution fee payable.................................................................................. 10,690
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 2,460,955
---------------
Net Assets................................................................................................ $ 181,396,293
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 1,813,963
Paid-in capital in excess of par....................................................................... 179,582,330
---------------
Net assets, August 31, 1996............................................................................... $ 181,396,293
---------------
---------------
Net asset value, offering price and redemption price per share ($181,396,293 / 181,396,293 shares of
beneficial interest
issued and outstanding; unlimited number of shares authorized)......................................... $1.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-145
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest and discount earned............... $ 6,925,960
---------------
Expenses
Management fee............................. 963,088
Distribution fee........................... 240,772
Transfer agent's fees and expenses......... 87,000
Custodian's fees and expenses.............. 60,000
Reports to shareholders.................... 35,000
Registration fees.......................... 24,000
Audit fee.................................. 10,800
Legal fees................................. 5,000
Trustee's fees............................. 3,900
Deferred organization expenses............. 2,000
Miscellaneous.............................. 9,198
---------------
Total expenses.......................... 1,440,758
Less: Management fee waiver (note 2)....... (85,123)
Custodian fee credit.................... (1,632)
---------------
Net expenses............................ 1,354,003
---------------
Net investment income......................... 5,571,957
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 5,571,957
---------------
---------------
</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 1996 1995
Operations
Net investment income....... $ 5,571,957 $ 5,328,982
------------- -------------
Net increase in net assets
resulting from
operations............... 5,571,957 5,328,982
------------- -------------
Dividends to shareholders...... (5,571,957) (5,328,982)
------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
subscribed............... 686,158,251 621,173,812
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................ 5,403,204 5,178,490
Cost of shares reacquired... (692,617,954) (602,179,432)
------------- -------------
Net increase (decrease) in
net assets from Series
share transactions....... (1,056,499) 24,172,870
------------- -------------
Total increase (decrease)...... (1,056,499) 24,172,870
Net Assets
Beginning of year.............. 182,452,792 158,279,922
------------- -------------
End of year.................... $ 181,396,293 $ 182,452,792
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-146
<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
fourteen 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 Net 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. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
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 was deferred and amortized over a
period of 60 months ended December 1995.
Custody Fee Credits: The Fund 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 LLC.
(``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 to PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. During
the year ended August 31, 1996, PMF waived 25% of its management fee for the
period September 1, 1995 through December 31, 1995. The amount of such fees
waived for the year ended August 31, 1996 amounted to $85,123 ($.0004 per share;
.044% of average net assets). Effective January 1, 1996 PMF ceased waiving any
portion of its management fee.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Fund through January 1,
1996. Effective January 2, 1996, Prudential Securities Incorporated (``PSI'')
became the distributor of the Fund and is serving the Fund under the same terms
and conditions as under the arrangement with PMFD. The Series reimbursed PMFD
and PSI for distributing and servicing the Series' shares pursuant to the plan
of distribution at an annual rate of .125 of 1% of the Series average daily net
assets. The distribution fee is accrued daily and payable monthly.
- --------------------------------------------------------------------------------
B-147
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY MONEY MARKET 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, 1996,
the Series incurred fees of approximately $79,000 for the services of PMFS. As
of August 31, 1996, approximately $6,200 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.
- --------------------------------------------------------------------------------
B-148
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <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
Net investment income and net realized
gains(a)................................... .03 .03 .02 .02 .04
Dividends and distributions................... (.03) (.03) (.02) (.02) (.04)
-------- -------- -------- -------- --------
Net asset value, end of year.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.............................. 2.92% 3.15% 1.90% 2.31% 3.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $181,396 $182,453 $158,280 $163,087 $164,092
Average net assets (000)...................... $192,617 $171,223 $169,123 $170,103 $155,915
Ratios to average net assets(a):
Expenses, including distribution fee....... .70% .64% .68% .64% .32%
Expenses, excluding distribution fee....... .57% .51% .55% .51% .19%
Net investment income...................... 2.89% 3.11% 1.87% 2.02% 3.33%
</TABLE>
- ---------------
(a) Net of management fee waiver and/or expense subsidy.
(b) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-149
<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, 1996, 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, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential Municipal
Series Fund, New Jersey Money Market Series, as of August 31, 1996, 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 14, 1996
B-150
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--94.9%
- ---------------------------------------------------------------------------------------------------------------------------------
City of Elmira, Wtr. Impt., Ser. B, A.M.B.A.C. Aaa 5.95% 3/01/16 $ 5,395 $ 5,420,087
City of New Rochelle Ind. Dev. Agcy.,
Coll. of New Rochelle BBB-(c) 6.625 7/01/12 500 513,290
Coll. of New Rochelle BBB-(c) 6.75 7/01/22 2,000 2,051,040
Dutchess Cnty. Res. Rec. Agcy. Rev., Solid Waste Mgmt.,
Ser. A, F.G.I.C. Aaa 7.50 1/01/09 1,150 1,251,534
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,745 2,015,580
Jefferson Cnty. Ind. Dev. Agcy., Solid Waste Disp. Rev. Baa1 7.20 12/01/20 1,500 1,590,630
Met. Trans. Auth. Facs. Rev.,
Commuter Facs., Ser. 7 Baa1 Zero 7/01/08 8,760 4,356,260
Commuter Facs., Ser. 7 Baa1 Zero 7/01/09 4,445 2,057,991
Commuter Facs., Ser. A, F.G.I.C. Aaa 5.60 7/01/09 500 502,535
Commuter Facs., Ser. A, F.G.I.C. Aaa 5.70 7/01/10 1,000 1,006,760
Commuter Facs., Ser. O Baa1 5.50 7/01/17 2,500 2,307,575
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.50 7/01/08 3,630 3,629,709
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.60 7/01/09 2,900 2,897,129
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.70 7/01/10 4,600 4,603,496
Trans. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/12 5,575 2,271,757
Trans. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 4,000 1,532,600
Trans. Facs. Rev., Ser. O Baa1 5.75 7/01/08 2,740 2,693,667
Trans. Facs. Rev., Ser. O Baa1 5.75 7/01/13 1,975 1,898,686
Mun. Assist. Corp. for New York City, Ser. E Aa 6.00 7/01/06 6,700 7,134,629
New York City Ind. Dev. Agcy., Spec. Fac. Rev.,
U.S.T.A. National Tennis Center Proj., F.S.A. Aaa 6.375 11/15/14 1,000 1,055,550
Y.M.C.A. Of Greater N.Y. Proj. NR 8.00 8/01/16 1,350 1,448,982
New York City, Gen. Oblig.,
Ser. A Aaa 7.75 3/15/03 3,330(d) 3,701,928
Ser. B Aaa 8.00 6/01/99 890(d) 972,610
Ser. B Baa1 8.00 6/01/99 130 140,349
Ser. B Baa1 7.50 2/01/01 4,000 4,340,000
Ser. B Baa1 5.875 8/15/12 9,000 8,531,550
Ser. D Baa1 8.00 8/01/03 2,500 2,785,600
Ser. D Baa1 7.70 2/01/09 3,040 3,366,982
Ser. F Baa1 8.20 11/15/03 3,000 3,371,400
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-151
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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., Ser. A Baa1 5.75% 7/01/13 $ 3,500 $ 3,361,190
City Univ. Refunding Bonds Baa1 6.00 7/01/14 6,500 6,415,370
City Univ. Sys. Cons., Ser. A Baa1 8.125 7/01/07 3,435 3,697,331
City Univ. Sys. Cons., Ser. A Baa1 5.625 7/01/16 5,600 5,271,280
City Univ. Sys. Cons., Ser. C, F.G.I.C. Aaa 7.50 7/01/10 3,500 4,181,030
City Univ. Sys. Cons., Ser. D Baa1 7.00 7/01/09 1,880 2,065,913
Coll. & Univ. Ed., M.B.I.A. Aaa Zero 7/01/04 2,255 1,504,694
Episcopal Hlth. Svcs., G.N.M.A. AAA(c) 7.55 8/01/29 3,000 3,239,970
Insured Mount Sinai Med. Sch., Ser. A, M.B.I.A. Aaa 5.00 7/01/13 2,945 2,723,506
Long Island Med. Ctr., Ser. A, F.H.A. Aa 7.625 8/15/08 2,595 2,739,749
Long Island Med. Ctr., Ser. A, F.H.A. Aa 7.75 8/15/27 4,100 4,335,832
Mental Hlth. Svcs. Fac. Impvt., Ser. B Baa1 6.50 8/15/11 3,000 3,101,640
Spec. Act. Sch. Districts, F.G.I.C. Aaa 7.00 7/01/13 3,050 3,316,326
St. Univ. Edl. Facs., Ser. A Baa1 5.25 5/15/15 8,600 7,754,706
St. Univ. Edl. Facs., Ser. B Baa1 7.50 5/15/11 4,660 5,355,878
New York St. Energy Resch. & Dev. Auth. Rev.,
Brooklyn Union Gas Co., Ser. B, M.B.I.A. Aaa 6.75 2/01/24 2,000(f) 2,132,860
Brooklyn Union Gas Co., Ser. D, M.B.I.A. Aaa 5.635(e) 7/08/26 4,000 3,735,120
Con. Edison Co. Aa3 7.50 7/01/25 6,735 7,204,429
Con. Edison Co., Ser.A Aa3 7.50 1/01/26 4,775 5,131,215
New York St. Environ. Facs. Corp., Poll. Ctrl. Rev.,
Ser. C Aaa 5.35 7/15/07 2,000 2,012,980
Ser. C Aaa 5.45 7/15/08 3,090 3,110,641
Ser. C Aaa 5.55 7/15/09 1,375 1,384,130
St. Wtr. Revolving Fund, Ser. B Aa 7.50 3/15/11 1,300 1,402,154
St. Wtr. Revolving Fund, Ser. E Aa 6.50 6/15/14 1,000 1,059,590
New York St. Hsg. Fin. Agcy. Rev., Ser. A,
Multifamily Hsg. Aa 7.05 8/15/24 1,000 1,050,160
Ref. Hsg. Proj. Mtge., Ser. A, F.S.A. Aaa 6.10 11/01/15 8,900 8,921,182
St. Univ. Constr., Ser. A Aaa 8.00 5/01/11 3,600(d) 4,415,256
New York St. Local Gov't. Assistance Corp.,
Ser. C A Zero 4/01/14 11,882 4,229,992
Ser. E A 6.00 4/01/14 6,135 6,302,915
Ser. E A 5.25 4/01/16 4,500 4,197,330
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-152
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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., M.B.I.A. Aaa 6.00% 8/15/02 $ 3,000 $ 3,179,790
Mental Hlth. Svcs., Ser. A Baa1 7.50 8/15/07 815 899,964
New York Hosp., Ser. A, A.M.B.A.C., F.H.A. Aaa 6.50 8/15/29 3,000 3,207,270
St. Francis Hosp., Proj. A, F.G.I.C. Aaa 7.60 11/01/08 2,350 2,534,310
New York St. Mtge. Agcy. Rev.,
Homeowner Mtge., Ser. A Aa 8.05 10/01/21 3,110 3,261,457
Homeowner Mtge., Ser 55 Aa 5.95 10/01/17 2,000 1,966,880
New York St. Mun. Bond Bank Agcy., Spec. Proj. Rev., Ser.
A A+(c) 6.75 3/15/11 3,000 3,195,030
New York St. Thrwy. Auth. Svc. Contract Rev., Local
Highway & Bridge Baa1 6.45 4/01/15 1,000 1,023,800
New York St. Urban Dev. Corp. Rev.,
Correctional Cap. Facs., A.M.B.A.C. Aaa Zero 1/01/08 10,000 5,424,000
Correctional Cap. Facs., Ser.5, A.M.B.A.C. Aaa 6.00 1/01/04 4,415 4,688,553
St. Facs. Baa1 5.75 4/01/11 5,000 4,832,200
St. Facs. Baa1 5.75 4/01/12 5,750 5,532,305
St. Facs. Baa1 5.60 4/01/15 2,000 1,881,140
Port Auth. of New York & New Jersey, Ser. 70 A1 7.25 8/01/25 1,000 1,069,700
Puerto Rico Comnwlth.,
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 6,500 7,503,860
Pub. Impvt. Rfdg., M.B.I.A. Aaa 7.00 7/01/10 1,250 1,443,050
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev., Ser. W Aaa 5.50 7/01/13 11,000 10,856,560
Puerto Rico Elec. Pwr. Auth. Rev., Pub. Impvt. Ref.,
M.B.I.A. Aaa Zero 7/01/04 11,895 8,028,649
Puerto Rico Pub. Bldgs. Auth. Rev. Gtd. Gov't. Facs., Ser.
A, A.M.B.A.C. Aaa 6.25 7/01/15 2,050 2,183,886
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.677(e) 1/25/07 7,875 7,707,656
Rockland Cnty. Solid Waste Mgmt. Auth., Ser. B, A.M.B.A.C. Aaa 5.625 12/15/14 1,585 1,525,325
Suffolk Cnty. Ind. Dev. Agcy., Southwest Swr. Sys. Rev.,
F.G.I.C. Aaa 6.00 2/01/07 1,000 1,067,830
Suffolk Cnty. Wtr. Auth. Rev., Ser. W AAA(c) 6.80 6/01/12 1,740(d) 1,913,530
Suffolk Cnty. Wtr. Auth., Waterworks Rev., M.B.I.A. Aaa 6.00 6/01/09 5,160 5,461,757
Triborough Bridge & Tunl. Auth. Rev., Ser. A, M.B.I.A. Aaa 6.00 1/01/10 2,000 2,110,900
Western Nassau Cnty. Wtr. Auth., Wtr. Sys. Rev.,
A.M.B.A.C. Aaa 5.65 5/01/26 2,000 1,932,880
------------
Total long-term investments (cost $281,374,188) 289,236,557
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-153
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.2%
New York City Hsg. Dev. Corp., E.17th St. Property, Ser.
93A, F.R.D.D. A-1(c) 3.85% 9/03/96 $ 200 $ 200,000
New York City Ind. Dev. Agcy. Rev., Japan Airlines, Ser.
91, F.R.D.D. A1+(c) 3.90 9/03/96 800 800,000
New York St. Energy. Resch. & Dev. Auth., Poll. Ctrl.
Rev.,
Niagara Mohawk Pwr. Corp., Ser. 85A, F.R.D.D. A1+(c) 3.95 9/03/96 900 900,000
Niagara Mohawk Pwr. Corp., Ser. 86A, F.R.D.D. P1 3.95 9/03/96 3,300 3,300,000
Niagara Mohawk Pwr. Corp., Ser. 87A, F.R.D.D. A2 4.05 9/03/96 5,900 5,900,000
Niagara Mohawk Pwr. Corp., Ser. 87B, F.R.D.D. A1+(c) 4.05 9/03/96 1,300 1,300,000
Port Auth. of New York & New Jersey, Ser. 3, F.R.D.D. VMIG1 3.65 9/03/96 200 200,000
------------
Total short-term investments (cost $12,600,000) 12,600,000
------------
Total Investments--99.1%
(cost $ 293,974,188; Note 4) 301,836,557
Other assets in excess of liabilities--0.9% >2,840,839
------------
Net Assets--100% $304,677,396
------------
------------
</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 Corporation.
(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) 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.
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-154
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Assets August 31, 1996
---------------
Investments, at value (cost $293,974,188)................................................................. $ 301,836,557
Cash...................................................................................................... 51,745
Interest receivable....................................................................................... 3,398,940
Receivable for Series shares sold......................................................................... 163,993
Due from broker-variation margin.......................................................................... 58,219
Prepaid expenses and other assets......................................................................... 9,386
---------------
Total assets........................................................................................... 305,518,840
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 312,861
Dividends payable......................................................................................... 247,785
Management fee payable.................................................................................... 118,098
Accrued expenses.......................................................................................... 86,487
Distribution fee payable.................................................................................. 73,513
Deferred trustee's fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 841,444
---------------
Net Assets................................................................................................ $ 304,677,396
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 258,869
Paid-in capital in excess of par....................................................................... 289,823,156
---------------
290,082,025
Accumulated net realized gain on investments........................................................... 6,655,377
Net unrealized appreciation on investments............................................................. 7,939,994
---------------
Net assets, August 31, 1996............................................................................... $ 304,677,396
---------------
---------------
Class A:
Net asset value and redemption price per share
($168,036,760 / 14,279,015 shares of beneficial interest issued and outstanding).................... $11.77
Maximum sales charge (3% of offering price)............................................................ .36
---------------
Maximum offering price to public....................................................................... $12.13
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($135,764,197 / 11,533,381 shares of beneficial interest issued and outstanding).................... $11.77
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($876,439 / 74,455 shares of beneficial interest issued and outstanding)............................ $11.77
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-115
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest and discount earned............ $ 19,028,429
-----------------
Expenses
Management fee.......................... 1,608,029
Distribution fee--Class A............... 168,291
Distribution fee--Class B............... 763,278
Distribution fee--Class C............... 4,941
Transfer agent's fees and expenses...... 165,000
Custodian's fees and expenses........... 98,000
Reports to shareholders................. 76,000
Registration fees....................... 44,500
Audit fees and expenses................. 12,300
Legal fees and expenses................. 10,000
Trustees' fees.......................... 3,900
Miscellaneous........................... 22,260
-----------------
Total expenses....................... 2,976,499
Less: Management fee waiver............. (160,803)
Custodian fee credit................ (17,613)
-----------------
Net expenses............................ 2,798,083
-----------------
Net investment income...................... 16,230,346
-----------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on:
Investment transactions................. 8,098,900
Financial futures transactions.......... 903,272
-----------------
9,002,172
-----------------
Net change in unrealized appreciation on:
Investments............................. (11,379,989)
Financial futures contracts............. 77,625
-----------------
(11,302,364)
-----------------
Net loss on investments.................... (2,300,192)
-----------------
Net Increase in Net Assets
Resulting from Operations.................. $ 13,930,154
-----------------
-----------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income.......... $ 16,230,346 $ 17,632,805
Net realized gain (loss) on
investment transactions..... 9,002,172 (425,049)
Net change in unrealized
appreciation of
investments................. (11,302,364) 5,023,826
------------ ------------
Net increase in net assets
resulting from operations... 13,930,154 22,231,582
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A..................... (8,811,465) (5,367,852)
Class B..................... (7,388,688) (12,248,452)
Class C..................... (30,193) (16,501)
------------ ------------
(16,230,346) (17,632,805)
------------ ------------
Distributions from net realized
gains
Class A..................... (701,061) --
Class B..................... (645,835) --
Class C..................... (2,246) --
------------ ------------
(1,349,142) --
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 18,427,055 18,761,553
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 10,492,197 10,361,213
Cost of shares reacquired...... (47,159,422) (52,939,335)
------------ ------------
Net decrease in net assets from
Series share transactions... (18,240,170) (23,816,569)
------------ ------------
Total decrease.................... (21,889,504) (19,217,792)
Net Assets
Beginning of year................. 326,566,900 345,784,692
------------ ------------
End of year....................... $304,677,396 $326,566,900
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-156
<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
fourteen 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.
Securities Transactions and Net 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. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
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.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- --------------------------------------------------------------------------------
B-157
<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 LLC.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $160,803 ($0.006 per share for the fiscal year
ended August 31, 1996). The Series is not required to reimburse PMF for such
waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'') became distributor of the Class A shares of the Fund and
is serving the Fund under the same terms and conditions as under the arrangement
with PMFD. PSI is also the distributor of the Class B and Class C shares of the
Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$44,000 in front-end sales charges resulting from sales of Class A shares during
the fiscal year ended August 31, 1996. From these fees, PMFD and PSI paid such
sales charges to 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, 1996, it
received approximately $317,700 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, 1996, the Series incurred fees of approximately $127,000 for the services of
PMFS. As of August 31, 1996, approximately $9,800 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 fiscal year ended August 31, 1996 were $276,839,476 and
$285,033,908, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1996
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation on investments for federal income tax purposes was
$7,862,369 (gross unrealized appreciation--$10,288,888, gross unrealized
depreciation--$2,426,519).
The Series utilized its capital loss carryforward of approximately $1,071,600 to
offset net taxable gains realized and recognized during the fiscal year ended
August 31, 1996.
At August 31, 1996 the Series sold 69 financial futures on U.S. Treasury bonds
which expire in December 1996. The value at sale of such contracts was
$7,445,531. The value of such contracts on August 31, 1996 was $7,367,906,
thereby resulting in an unrealized gain of $77,625.
- --------------------------------------------------------------------------------
B-158
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
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%. 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 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, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold....................... 288,545 $ 3,471,580
Shares issued in reinvestment of
dividends and distributions..... 482,548 5,793,739
Shares reacquired................. (1,836,870) (21,951,600)
----------- -------------
Net decrease in shares outstanding
before conversion............... (1,065,777) (12,686,281)
Shares issued upon conversion from
Class B......................... 1,655,227 19,855,903
----------- -------------
Net increase in shares
outstanding..................... 589,450 $ 7,169,622
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold....................... 1,214,638 $ 14,603,191
Shares issued in reinvestment of
dividends and distributions..... 388,580 4,669,975
Shares reacquired................. (2,099,335) (25,184,658)
----------- -------------
Net decrease in shares outstanding
before conversion............... (496,117) (5,911,492)
Shares reacquired upon conversion
into Class A.................... (1,655,227) (19,855,903)
----------- -------------
Net decrease in shares
outstanding..................... (2,151,344) $ (25,767,395)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
Class C
- ----------------------------------
Year ended August 31, 1996:
Shares sold....................... 29,584 $ 352,284
Shares issued in reinvestment of
dividends and distributions..... 2,378 28,483
Shares reacquired................. (1,951) (23,164)
----------- -------------
Net increase in shares
outstanding..................... 30,011 $ 357,603
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
B-159
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended August 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------------ -------- ------- ------- ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year............................. $ 11.91 $ 11.71 $ 12.54 $ 11.75 $11.08
------------ -------- ------- ------- ------
Income from investment operations
Net investment income............... .63(a) .66(a) .67 .70 .71
Net realized and unrealized gain
(loss) on investment
transactions..................... (.09) .20 (.83) .79 .67
------------ -------- ------- ------- ------
Total from investment
operations.................... .54 .86 (.16) 1.49 1.38
------------ -------- ------- ------- ------
Less distributions
Dividends from net investment
income........................... (.63) (.66) (.67) (.70) (.71)
Distributions from net realized
gains............................ (.05) -- -- -- --
------------ -------- ------- ------- ------
Total distributions.............. (.68) (.66) (.67) (.70) (.71)
------------ -------- ------- ------- ------
Net asset value, end of year........ $ 11.77 $ 11.91 $ 11.71 $ 12.54 $11.75
------------ -------- ------- ------- ------
------------ -------- ------- ------- ------
TOTAL RETURN(b):.................... 4.53% 7.70% (1.38)% 13.06% 12.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....... $168,037 $163,025 $13,661 $11,821 $6,057
Average net assets (000)............ $168,291 $ 95,024 $13,454 $ 8,755 $4,024
Ratios to average net assets:
Expenses, including distribution
fees.......................... .68%(a) .69%(a) .74% .74% .74%
Expenses, excluding distribution
fees.......................... .58%(a) .59%(a) .64% .64% .64%
Net investment income............ 5.24%(a) 5.65%(a) 5.46% 5.78% 6.19%
Portfolio turnover rate............. 92% 57% 49% 44% 45%
</TABLE>
- ---------------
(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-160
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
Class B ------------
------------------------------------------------------------------- Year
Year Ended August 31, Ended
------------------------------------------------------------------- August 31,
1996 1995 1994 1993 1992 1996
<S> <C> <C> <C> <C> <C> <C>
------------ -------- -------- -------- -------- -----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $11.91
------------ -------- -------- -------- -------- -----
Income from investment operations
Net investment income............... .58(a) .61(a) .62 .65 .66 .55(a)
Net realized and unrealized gain
(loss) on investment
transactions..................... (.09) .20 (.83) .79 .67 (.09)
------------ -------- -------- -------- -------- -----
Total from investment
operations.................... .49 .81 (.21) 1.44 1.33 .46
------------ -------- -------- -------- -------- -----
Less distributions
Dividends from net investment
income........................... (.58) (.61) (.62) (.65) (.66) (.55)
Distributions from net realized
gains............................ (.05) -- -- -- -- (.05)
------------ -------- -------- -------- -------- -----
Total distributions (.63) (.61) (.62) (.65) (.66) (.60)
------------ -------- -------- -------- -------- -----
Net asset value, end of period...... $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75 $11.77
------------ -------- -------- -------- -------- -----
------------ -------- -------- -------- -------- -----
TOTAL RETURN(b):.................... 4.12% 7.27% (1.77)% 12.61% 12.32% 3.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $135,764 $163,013 $331,982 $358,607 $316,472 $ 876
Average net assets (000)............ $152,656 $230,033 $350,564 $330,823 $303,016 $ 659
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.08%(a) 1.11%(a) 1.14% 1.14% 1.14% 1.33%(a)
Expenses, excluding distribution
fees.......................... .58%(a) .61%(a) .64% .64% .64% .58%(a)
Net investment income............ 4.84%(a) 5.30%(a) 5.06% 5.38% 5.79% 4.59%(a)
Portfolio turnover rate............. 92% 57% 49% 44% 45% 92%
<CAPTION>
August 1,
Ended 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(a) .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)
Distributions from net realized
gains............................ -- --
----- -----
Total distributions (.58) (.04)
----- -----
Net asset value, end of period...... $11.91 $11.71
----- -----
----- -----
TOTAL RETURN(b):.................... 7.01% 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
fees.......................... 1.36%(a) 1.62%(c)
Expenses, excluding distribution
fees.......................... .61%(a) .87%(c)
Net investment income............ 5.05%(a) 5.17%(c)
Portfolio turnover rate............. 57% 49%
</TABLE>
- ---------------
(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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-161
<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, 1996, 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1996
B-162
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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 Cnty., Ser. 96B, B.A.N. NR 3.50% 2/19/97 $ 6,525 $ 6,535,330
Amherst Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co., Ser.
85, S.E.M.O.T. A1+(c) 3.65 11/01/96 3,100 3,100,000
Babylon Ind. Dev. Agcy. Rev., Res. Rec. Rev., Ser. 89,
F.R.D.D. A1+(c) 3.70 9/03/96 11,800 11,800,000
Babylon, Ser. 95, R.A.N. NR 3.85 10/30/96 4,500 4,502,980
Clinton Cnty. Ind. Dev. Agcy Rev., Ser. 96A, F.R.W.D. A-1(c) 3.55 9/05/96 3,500 3,500,000
Dist. of Columbia., Gen. Oblig., Ser. 92A-4, F.R.D.D. VMIG1 3.95 9/03/96 4,400 4,400,000
Erie Cnty. Industrial Development Agency, Ser. A, R.A.N. MIG1 4.25 4/17/97 5,500 5,521,532
Erie Cnty., Ser. 95, R.A.N. MIG1 4.50 9/20/96 1,800 1,800,585
Gulf Coast Waste Disposal Authority, Ser. 95 F.R.D.D. VMIG1 3.95 9/03/96 3,000 3,000,000
Hempstead Town, Ser. 96A, B.A.N. NR 3.50 2/28/97 5,000 4,992,577
Islip, Ser. 96, B.A.N. NR 4.25 7/25/97 5,000 5,012,901
Monroe Cnty. Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co.,
Ser. 84, S.E.M.O.T. A1+(c) 3.70 3/01/97 7,000 7,000,000
Nassau Cnty., General Improvement, Series 96T Aaa 5.125 9/01/97 8,180 8,280,874
New York City, Gen. Oblig.,
Ser. 94H-2, T.E.C.P. VMIG1 3.70 11/14/96 5,000 5,000,000
Ser. 95F-3, F.R.W.D. VMIG1 3.40 9/04/96 6,300 6,300,000
Ser. 95F-5, F.R.W.D. VMIG1 3.40 9/04/96 4,500 4,500,000
Ser. J2, T.E.C.P. NR 3.50 10/31/96 5,000 5,000,000
New York City Hsg. Dev. Corp.,
400 West 59th St. Proj., Ser. 95A-1, F.R.W.D. A-1(c) 3.35 9/04/96 10,000 10,000,000
400 West 59th St. Proj., Ser. 95A-2, F.R.W.D. A-1(c) 3.45 9/04/96 5,000 5,000,000
E.17th St. Property, Ser. 93A, F.R.D.D. A-1(c) 3.85 9/03/96 3,000 3,000,000
James Tower Proj., Ser. 94A, F.R.W.D. A1(c) 3.35 9/04/96 6,500 6,500,000
Multi Fam. Columbus Ave., Ser. 93A, F.R.W.D. A1+(c) 3.40 9/04/96 4,000 4,000,000
New York City Ind. Dev. Agcy. Rev., Japan Airlines, Ser.
91, F.R.D.D. A1+(c) 3.90 9/03/96 9,700 9,700,000
New York City Mun. Water Fin. Auth., Water & Sew. Rev.,
Ser. 88A Aaa 9.00 6/15/97 5,000(e) 5,300,570
New York City Transit Authority Special Obligation Ser.
96A, R.A.N. MIG2 4.25 12/12/96 10,600 10,612,246
New York City Trust Cultural Res. Rev.,
Museum of Broadcasting, Ser. 89, F.R.W.D. VMIG1 3.50 9/04/96 2,100 2,100,000
The Jewish Museum Proj., Ser. 92, F.R.W.D. VMIG1 3.50 9/04/96 7,200 7,200,000
New York St. Dorm. Auth. Rev.,
Ellis Hospital, Ser 1995 PT75, F.R.W.D.S. A1+(c) 3.50 9/05/96 8,600 8,600,000
Mem. Sloan Kettering, Ser. 89A, T.E.C.P. VMIG1 3.55 10/18/96 1,000 1,000,000
Rockefeller Univ., Ser. 91A, F.R.W.D.S Aaa 3.62 9/04/96 14,000 14,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-163
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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. Energy Res. & Dev. Auth.,
Long Island Ltg. Co. Proj., Ser. 85A, A.N.N.M.T. VMIG1 3.25% 3/01/97 $ 5,000 $ 5,000,000
Long Island Ltg. Co. Proj., Ser. 95A, F.R.W.D. VMIG1 3.25 9/04/96 5,000 5,000,000
New York St. Elec. & Gas Ser. 85A, A.N.N.O.T. P1 3.30 3/15/97 5,000 5,000,000
Niagara Mohawk Pwr. Corp., Ser. 85B, F.R.D.D. P1 3.85 9/03/96 600 600,000
Niagara Mohawk Pwr. Corp., Ser. 85C, F.R.D.D. A1+(c) 3.85 9/03/96 400 400,000
Niagara Mohawk Pwr. Corp., Ser. 86A, F.R.D.D. P1 3.95 9/03/96 16,100 16,100,000
Niagara Mohawk Pwr. Corp., Ser. 87B, F.R.D.D. A1+(c) 4.05 9/03/96 400 400,000
Niagara Mohawk Pwr. Corp., Ser. 88A, F.R.D.D. A1+(c) 4.05 9/03/96 5,900 5,900,000
New York St. Environ. Facs. Corp., Solid Waste Disp. Rev.,
Ser. 92A, T.E.C.P. P1 3.60 9/12/96 4,800 4,800,000
New York St., Gen. Oblig., Ser. R, T.E.C.P. P1 3.55 10/04/96 4,800 4,800,000
New York St. Hsg. Fin. Auth., Liberty View Apts., Ser.
85A, F.R.W.D. VMIG1 3.45 9/04/96 11,600 11,600,000
New York St. Job Dev. Auth., F.R.M.D.,
Ser. 84D MIG1 3.70 9/03/96 1,470 1,470,000
Ser. 84E VMIG1 3.70 9/03/96 3,445 3,445,000
Ser. 84F VMIG1 3.70 9/03/96 1,350 1,350,000
Ser. 86C VMIG1 3.85 9/03/96 1,105 1,105,000
New York St. Local Gov't Assistance Corp., Var. Rate Bonds
Ser. 95B, F.R.W.D. VMIG1 3.20 9/04/96 5,000 5,000,000
Ser. 95E, F.R.W.D. VMIG1 3.35 9/04/96 10,900 10,900,000
New York St., Thruway Auth. Rev., Ser. C, F.R.W.D.S. NR 3.60 9/05/96 7,000 7,000,000
Niagara Cnty. Ind. Dev. Agcy. Rev., Gen. Abrasive
Treibacher,
Ser. 91, F.R.W.D. P1 3.60 9/04/96 4,600 4,600,000
Oswego Cnty. Ind. Dev. Agcy. Rev., Phillip Morris Co.,
Ser. 92, F.R.W.D. P1 3.40 9/04/96 6,300 6,300,000
Port Auth. of New York & New Jersey,
Ser. 4, F.R.D.D. VMIG1 3.80 9/03/96 600 600,000
Ser. 93-1, F.R.W.D. CPS1 3.441 9/03/96 12,000 12,000,000
Puerto Rico Commwlth.,
Gov't. Dev. Bank, Ser. 95, T.E.C.P. A-1(c) 3.55 9/05/96 3,000 3,000,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P. A-1(c) 3.55 10/07/96 7,400 7,400,000
Rochester Cnty., Ser. I, B.A.N. NR 4.25 10/31/96 5,000 5,003,717
Sachem Central School District, Ser. 96, R.A.N. NR 4.00 9/25/96 4,510 4,510,709
Saratoga Springs School District, Ser. 96, R.A.N. NR 4.00 11/19/96 3,100 3,102,484
Smithtown Central School District, Ser. 96-97, T.A.N. NR 4.25 6/26/97 9,580 9,606,322
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-164
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Southwestern Illinois Dev. Auth. Solid Waste Disp. Rev.,
Shell Oil Co., Wood River Proj., Ser. 92, F.R.D.D. A1+(c) 3.95% 9/03/96 $ 2,800 $ 2,800,000
Syracuse, Ser. 95, B.A.N. NR 4.00 12/20/96 8,000 8,008,099
Tarrytowns Union Free School District, Ser. 96,T.A.N. NR 4.25 6/25/97 3,950 3,959,287
Yates Cnty. Ind. Dev. Agcy. Rev., Clearpass Containers
Inc., Ser. 92A, F.R.W.D. A-1(c) 3.40 9/05/96 1,330 1,330,000
------------
Total Investments--97.1%
(cost $339,350,213(d)) 339,350,213
Other assets in excess of liabilities--2.9% 10,119,594
------------
Net Assets--100% $349,469,807
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
A.N.N.O.T.--Annual Optional Tender.
B.A.N--Bond Anticipation Note.
F.R.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).
F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic (b).
R.A.N.--Revenue Anticipation Note.
S.E.M.O.T.--Semi-Annual Optional Tender.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
(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.
(e) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-165
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1996
<S> <C>
Investments, at amortized cost which approximates market value............................................ $ 339,350,213
Cash>..................................................................................................... 44,944
Receivable for investments sold........................................................................... 16,770,925
Receivable for Series shares sold......................................................................... 3,872,190
Interest receivable....................................................................................... 2,282,776
Deferred expenses and other assets........................................................................ 9,725
---------------
Total assets........................................................................................... 362,330,773
---------------
Liabilities
Payable for investments purchased......................................................................... 7,000,000
Payable for Series shares reacquired...................................................................... 5,356,788
Accrued expenses and other liabilities.................................................................... 168,548
Dividends payable......................................................................................... 165,565
Management fee payable.................................................................................... 147,080
Distribution fee payable.................................................................................. 20,285
Deferred trustees' fee.................................................................................... 2,700
---------------
Total liabilities...................................................................................... 12,860,966
---------------
Net Assets................................................................................................ $ 349,469,807
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 3,494,698
Paid-in capital in excess of par....................................................................... 345,975,109
---------------
Net assets, August 31, 1996............................................................................... $ 349,469,807
---------------
---------------
Net asset value, offering price and redemption price per share ($349,469,807 / 349,469,807 shares
of beneficial interest issued and outstanding; unlimited number of shares authorized).................. $1.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-166
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................... $12,223,232
---------------
Expenses
Management fee............................. 1,682,136
Distribution fee........................... 420,534
Transfer agent's fees and expenses......... 137,000
Custodian's fees and expenses.............. 80,000
Reports to shareholders.................... 47,000
Registration fees.......................... 29,000
Audit fees and expenses.................... 10,800
Legal fees and expenses.................... 5,000
Trustees' fees............................. 3,900
Miscellaneous.............................. 11,209
---------------
Total expenses.......................... 2,426,579
Less: custodian fee credit................. (3,599)
---------------
Net expenses............................ 2,422,980
---------------
Net investment income......................... 9,800,252
Net realized gain on investments.............. 1,956
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 9,802,208
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income.... $ 9,800,252 $ 8,853,758
Net realized gain on
investment
transactions.......... 1,956 --
--------------- ---------------
Net increase in net
assets resulting from
operations............ 9,802,208 8,853,758
--------------- ---------------
Dividends and distributions
to shareholders.......... (9,802,208) (8,853,758)
--------------- ---------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold.................. 1,133,204,969 1,099,424,608
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions......... 9,471,692 8,564,122
Cost of shares
reacquired............ (1,117,904,471) (1,052,364,310)
--------------- ---------------
Net increase in net
assets from Series
share transactions.... 24,772,190 55,624,420
--------------- ---------------
Total increase.............. 24,772,190 55,624,420
Net Assets
Beginning of year........... 324,697,617 269,073,197
--------------- ---------------
End of year................. $ 349,469,807 $ 324,697,617
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-167
<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
fourteen 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 Net 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. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
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.
Custody Fee Credits: The Fund 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 LLC.
(``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 had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Fund through January 1,
1996. Effective January 2, 1996, Prudential Securities Incorporated (``PSI'')
became the distributor of the Fund and is serving the Fund under the same terms
and conditions as under the arrangement with PMFD. The Series reimbursed PMFD
and PSI for distributing and servicing the Series' shares pursuant to the plan
of distribution at an annual rate of .125 of 1% of the Series' average daily net
assets. The distribution fee is accrued daily and payable monthly.
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, 1996,
the Series incurred fees of approximately $122,400 for the services of PMFS. As
of August 31, 1996, approximately $9,800 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.
- --------------------------------------------------------------------------------
B-168
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<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 .03 .02 .02
Dividends and distributions to shareholders.............................. (.03) (.03) (.02) (.02)
-------- -------- -------- --------
Net asset value, end of year............................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(a):......................................................... 2.97% 3.06% 1.80% 1.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................ $349,470 $324,698 $269,073 $286,304
Average net assets (000)................................................. $336,427 $292,763 $280,492 $275,640
Ratios to average net assets:
Expenses, including distribution fee.................................. .72% .73% .77% .75%
Expenses, excluding distribution fee.................................. .60% .61% .64% .63%
Net investment income................................................. 2.91% 3.02% 1.78% 1.75%
<CAPTION>
1992
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................................... $ 1.00
Net investment income and net realized gains............................. .03
Dividends and distributions to shareholders.............................. (.03)
--------
Net asset value, end of year............................................. $ 1.00
--------
--------
TOTAL RETURN(a):......................................................... 2.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................ $249,785
Average net assets (000)................................................. $248,557
Ratios to average net assets:
Expenses, including distribution fee.................................. .76%
Expenses, excluding distribution fee.................................. .63%
Net investment income................................................. 2.83%
</TABLE>
- ---------------
(a) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-169
<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, 1996, 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, 1996 by correspondence with the custodian and broker. 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, 1996, 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 14, 1996
B-170
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--96.5%
- ---------------------------------------------------------------------------------------------------------------------------------
Buncombe Cnty., Pub. Impvt. Bonds Aa 6.90% 3/01/09 $ 1,000(d) $ 1,077,810
Cary Sanitary Sewer Aa1 5.20 4/01/09 500 490,925
Charlotte Pub. Impvt. Aaa 5.40 4/01/15 1,500 1,457,115
Charlotte Mecklenberg Hosp., Hlth. Care Sys. Rev. Aa 6.25 1/01/20 750 760,920
Charlotte Wtr. & Swr. Aaa 6.20 6/01/17 1,500(d) 1,633,995
Charlotte Wtr. & Swr. Aaa 5.90 2/01/19 1,000 1,025,210
Charlotte, Cert. of Part., Conv. Fac. Proj., A.M.B.A.C. Aaa 5.00 12/01/21 3,000 2,629,710
City of Greensboro Enterprise Sys. Rev., Comb Ser. A A1 5.30 6/01/15 1,000 954,190
Concord Util. Sys. Rev., M.B.I.A. Aaa 5.50 12/01/14 1,000 977,390
Craven Cnty., M.B.I.A. Aaa 5.50 6/01/16 1,000 978,700
Dare Cnty., Util. Sys. Rev., M.B.I.A. Aaa 5.75 6/01/14 500 489,075
Davidson Cnty. Aa 5.40 6/01/14 800 776,648
Durham Cnty., Pub. Impvt. Aaa 4.60 5/01/04 2,000 1,972,200
Durham, Gen. Oblig. Aa1 5.10 2/01/15 1,000 931,750
Fayetteville, Cert. of Part., San. Swr. & Pub. Impvt.,
A.M.B.A.C. Aaa 6.875 12/01/08 1,750 1,908,655
Gastonia, Gen. Oblig., Wtr. Sys. & St. Impvt., F.G.I.C. Aaa 5.25 4/01/09 1,625 1,594,141
Haywood Cnty., Ind. Facs. & Poll. Ctrl.,
Fin. Auth. Environ. Impvt. Rev. Baa1 6.25 9/01/25 750 737,970
Fin. Auth. Environ. Impvt. Rev., Ser. A Baa1 5.75 12/01/25 1,000 911,350
Lincoln Cnty. Gen. Oblig., Ref., F.G.I.C. Aaa 5.10 6/01/09 1,170 1,123,984
Martin Cnty. Ind. Facs. & Poll. Ctrl. Fin. Auth. Rev.,
Weyerhaueser Co. Proj. A2 8.50 6/15/99 200 219,124
Mecklenberg Cnty., Pub. Impvt. Aaa 5.00 4/01/08 1,000 976,760
Mecklenburg Cnty., Pub. Impvt. Aaa 4.80 3/01/06 1,050 1,031,929
New Hanover Cnty. Hosp. Rev., Regl. Med. Ctr. Proj.,
A.M.B.A.C. Aaa 4.75 10/01/23 1,600 1,345,040
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev. A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,027,920
Pwr. E.T.M. prerefunded, Ser. A Aaa 6.50 1/01/18 1,995 2,198,251
Pwr. Sys. Rev., Ser. A A 6.50 1/01/18 1,005 1,039,090
Pwr. Sys. Rev., Ser. B Aaa 6.00 1/01/26 650 (d) 659,288
Pwr. Sys. Rev., Ser. A A 6.40 1/01/21 1,000 995,010
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-171
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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 Hsg. Fin. Agcy., Sngl. Fam. Mtge. Rev., Ser. G Aa 7.80% 3/01/21 $ 670 $ 701,329
No. Carolina Med. Care Comn., Hlth. Care Facs. Rev.,
Stanley Mem. Hosp. Proj. Baa1 7.80 10/01/19 650 722,781
North Carolina Med. Care Comn. Hlth. Care Fac. Rev.,
Stanley Mem. Hosp. Proj., A.M.B.A.C. Aaa 5.375 10/01/19 1,500 1,397,730
No. Carolina Med. Care Comn., Hosp. Rev.,
Annie Pen Mem. Hosp. Proj. Baa 7.50 8/15/21 1,000 1,032,310
Rex Hosp. Proj. A1 6.25 6/01/17 1,750 1,761,497
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev., A.M.B.A.C. Aaa 5.25 1/01/09 1,000 981,250
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.00 1/01/10 1,250 1,310,825
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.97(e) 1/01/12 2,000 1,830,000
North Carolina Gen. Oblig. Cap. Impvt., Ser. A Aaa 4.70 2/01/10 1,200 1,104,540
Northern Hosp. Dist. Surry Cnty. Hlth. Care Facs. Rev., No.
Carolina Hosp. Ba1 7.875 10/01/21 1,500 1,563,120
Pitt Cnty. Rev., Pitt Cnty. Mem. Hosp. Aa 5.25 12/01/21 1,500 1,369,005
Puerto Rico Comnwlth.,
Gen. Oblig., F.S.A. Aaa 7.958(e) 7/01/20 1,300 1,269,125
Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 1,240 1,306,315
Puerto Rico Elec. Pwr. Auth. Rev., Pwr. Rev. Bds. Baa1 5.50 7/01/20 1,520 1,402,474
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Facs., Upjohn
Co. Proj. Aa3 7.50 12/01/23 500 544,860
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.677(e) 1/25/07 1,000 978,750
Puerto Rico Univ. Sys. Rev., Ser. M, M.B.I.A. Aaa 5.25 6/01/25 1,000 923,400
Union Cnty. Wtr. & Swr., Solid Waste Rev. A1 6.50 4/01/07 850 912,645
University of No. Carolina Chapel Hill Hosp. Rev. Aa 5.25 2/15/26 1,000 914,860
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 415 437,701
Wake Cnty. Hosp. Rev., M.B.I.A. Aaa 5.125 10/01/26 1,500 1,321,890
Winston Salem, Sngl. Fam. Mtge. Rev. A1 8.00 9/01/07 410 425,961
Winston Salem, Wtr. & Swr., Sys. Rev., Ser. B Aa 5.70 6/01/17 1,000 977,310
-----------
Total long-term investments (cost $56,471,948) 57,113,828
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-172
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--2.5%
Halifax Cnty. Ind. Facs. & Poll. Ctrl., Westmoreland L.G. &
E. Partners, Ser. 93 F.R.D.D. A-1+(c) 3.95% 9/03/96 $ 1,400 $ 1,400,000
Halifax Cnty. Ind. Facs. & Poll. Ctrl., Westmoreland-Hadson
Roano, Ser. 91 F.R.D.D. Aa2 4.05 9/03/96 100 100,000
-----------
Total short-term investments (cost $1,500,000) 1,500,000
-----------
Total Investments--99.0%
(cost $ 57,971,948; Note 4) 58,613,828
Other assets in excess of liabilities--1.0% 576,319
-----------
Net Assets--100% $59,190,147
-----------
-----------
</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 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.
(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) 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.
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-173
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1996
Investments, at value (cost $57,971,948).................................................................. $ 58,613,828
Cash...................................................................................................... 30,458
Interest receivable....................................................................................... 892,099
Receivable for Series shares sold......................................................................... 15,250
Receivable for investments sold........................................................................... 15,000
Other assets.............................................................................................. 1,873
---------------
Total assets........................................................................................... 59,568,508
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 166,195
Accrued expenses.......................................................................................... 124,846
Dividends payable......................................................................................... 45,802
Management payable........................................................................................ 22,969
Distribution fee payable.................................................................................. 15,849
Deferred trustees' fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 378,361
---------------
Net Assets................................................................................................ $ 59,190,147
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 53,528
Paid-in capital in excess of par....................................................................... 57,679,667
---------------
57,733,195
Accumulated net realized gain on investments........................................................... 815,072
Net unrealized appreciation on investments............................................................. 641,880
---------------
Net assets, August 31, 1996............................................................................... $ 59,190,147
---------------
---------------
Class A:
Net asset value and redemption price per share
($28,088,731 / 2,540,740 shares of beneficial interest issued and outstanding)...................... $11.06
Maximum sales charge (3% of offering price)............................................................ .34
---------------
Maximum offering price to public....................................................................... $11.40
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($31,028,910 / 2,805,475 shares of beneficial interest issued and outstanding)...................... $11.06
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($72,506 / 6,556 shares of beneficial interest issued and outstanding).............................. $11.06
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-174
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................... $ 3,671,215
---------------
Expenses
Management fee............................. 316,510
Distribution fee--Class A.................. 27,628
Distribution fee--Class B.................. 178,025
Distribution fee--Class C.................. 514
Reports to shareholders.................... 105,000
Custodian's fees and expenses.............. 90,000
Transfer agent's fees and expenses......... 37,000
Registration fees.......................... 35,000
Audit fee and expenses..................... 12,300
Legal fees and expenses.................... 10,000
Directors' fees and expenses............... 3,900
Miscellaneous.............................. 12,118
---------------
Total expenses.......................... 827,995
Less: Management fee waiver............. (31,651)
Custodian fee credit................. (4,609)
---------------
Net expenses............................ 791,735
---------------
Net investment income......................... 2,879,480
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,009,689
Financial futures contracts................ (56,144)
Written options transactions............... 16,880
---------------
970,425
---------------
Net change in unrealized
appreciation/depreciation on:
Investments................................ (957,729)
Financial futures contracts................ (52,187)
---------------
(1,009,916)
---------------
Net loss on investments....................... (39,491)
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,839,989
---------------
---------------
</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 1996 1995
<S> <C> <C>
Operations
Net investment income.......... $ 2,879,480 $ 3,451,275
Net realized gain on investment
transactions................ 970,425 675,725
Net change in unrealized
depreciation of
investments................. (1,009,916) (130,375)
------------ ------------
Net increase in net assets
resulting from operations... 2,839,989 3,996,625
------------ ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (1,319,689) (800,554)
Class B..................... (1,556,956) (2,649,245)
Class C..................... (2,835) (1,476)
------------ ------------
(2,879,480) (3,451,275)
------------ ------------
Distributions from net realized
gains
Class A..................... (283,246) --
Class B..................... (369,288) --
Class C..................... (674) --
------------ ------------
(653,208) --
------------ ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 2,409,691 4,576,741
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 1,901,502 1,814,783
Cost of shares reacquired...... (11,119,778) (11,959,150)
------------ ------------
Net decrease in net assets from
Series share transactions... (6,808,585) (5,567,626)
------------ ------------
Total decrease.................... (7,501,284) (5,022,276)
Net Assets
Beginning of year................. 66,691,431 71,713,707
------------ ------------
End of year....................... $ 59,190,147 $ 66,691,431
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-175
<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
fourteen 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.
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, 1996.
Securities Transactions and Net 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. Expenses
are recorded on the accrual basis which may require the use of certain estimates
made by management.
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.
- --------------------------------------------------------------------------------
B-176
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
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.
Custody Fee Credits: The Fund 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 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. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $31,651 ($0.006 per share for Class A, B and C
shares; .05% of average net assets, annualized). The Series is not required to
reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996 Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI 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 PSI and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$2,600 in front-end sales charges resulting from sales of Class A shares during
the year ended August 31, 1996. From these fees, PMFD and PSI paid such sales
charges to affiliated broker-dealers which in turn paid commissions to sales
persons and incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1996, it received
approximately $109,600 in contingent deferred sales charges imposed upon certain
redemptions by Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other 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,
1996, the Series incurred fees of approximately $26,800 for the services of
PMFS. As of August 31, 1996, approximately $2,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-177
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1996 were $13,823,323 and
$19,348,514, respectively.
The cost basis of investments for federal income tax purposes was substantially
the same as for financial reporting purposes and, accordingly, as of August 31,
1996, net unrealized appreciation for federal income tax purposes was $641,880
(gross unrealized appreciation--$1,567,100; gross unrealized
depreciation--$925,220).
Transactions in written options during the period ended August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options written...................... 75 16,880
Options expired...................... (75) (16,880)
--------- --------
Options outstanding at August 31,
1996............................... 0 0
--------- --------
--------- --------
</TABLE>
- ------------------------------------------------------------
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
will 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 qualify 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,
1996 and 1995, were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 26,122 $ 294,382
Shares issued in reinvestment of
dividends and distributions....... 77,298 872,346
Shares reacquired................... (371,852) (4,173,584)
---------- ------------
Net decrease in shares outstanding
before conversion................. (268,432) (3,006,856)
Shares issued upon conversion from
Class B........................... 438,352 4,936,059
---------- ------------
Net increase in shares
outstanding....................... 169,920 $ 1,929,203
---------- ------------
---------- ------------
<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
---------- ------------
---------- ------------
Class B
- ------------------------------------
Year ended August 31, 1996:
Shares sold......................... 184,643 $ 2,097,677
Shares issued in reinvestment of
dividends and distributions....... 90,870 1,026,914
Shares reacquired................... (617,133) (6,946,194)
---------- ------------
Net decrease in shares outstanding
before conversion................. (341,620) (3,821,603)
Shares issued upon conversion from
Class B........................... (437,963) (4,936,059)
---------- ------------
Net decrease in shares
outstanding....................... (779,583) $ (8,757,662)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
Class C
- ------------------------------------
Year ended August 31, 1996:
Shares sold......................... 1,566 $ 17,632
Shares issued in reinvestment of
dividends......................... 199 2,242
---------- ------------
Net increase in shares
outstanding....................... 1,765 $ 19,874
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-178
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
Year Ended August 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.19 $ 11.06 $12.04 $11.37 $10.86
------- ------- ------ ------ ------
Income from investment operations
Net investment income................ .53 .60(a) .61 .65 .67
Net realized and unrealized gain
(loss) on investment
transactions...................... (.01) .13 (.76) .67 .51
------- ------- ------ ------ ------
Total from investment
operations..................... .52 .73 (.15) 1.32 1.18
------- ------- ------ ------ ------
Less distributions
Dividends from net investment
income............................ (.53) (.60) (.61) (.65) (.67)
Distributions from net realized
gains............................. (.12) -- (.22) -- --
------- ------- ------ ------ ------
Total distributions............... (.65) (.60) (.83) (.65) (.67)
------- ------- ------ ------ ------
Net asset value, end of year......... $ 11.06 $ 11.19 $11.06 $12.04 $11.37
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):..................... 4.70% 6.86% (1.35)% 11.99% 11.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $28,089 $26,519 $2,256 $1,777 $ 917
Average net assets (000)............. $27,628 $15,244 $2,067 $1,316 $ 612
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.03%(a) .98%(a) .88% .87% .91%
Expenses, excluding distribution
fees........................... .93%(a) .88%(a) .78% .77% .81%
Net investment income............. 4.78%(a) 5.25%(a) 5.31% 5.55% 5.90%
Portfolio turnover rate.............. 23% 28% 17% 38% 36%
</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-179
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- -------------------------
Year Year
Year Ended August 31, Ended Ended
------------------------------------------------------- August 31, August 31,
1996 1995 1994 1993 1992 1996 1995
------- ------- ------- ------- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 11.19 $11.06
------- ------- ------- ------- ------- ---------- -----
Income from investment operations
Net investment income................ .49(a) .55(a) .56 .60 .62 .46 .52(a)
Net realized and unrealized gain
(loss) on investment
transactions...................... (.01) .13 (.77) .68 .51 (.01) .13
------- ------- ------- ------- ------- ---------- -----
Total from investment
operations..................... .48 .68 (.21) 1.28 1.13 .45 .65
------- ------- ------- ------- ------- ---------- -----
Less distributions
Dividends from net investment
income............................ (.49) (.55) (.56) (.60) (.62) (.46) (.52)
Distributions from net realized
gains............................. (.12) -- (.22) -- -- (.12) --
------- ------- ------- ------- ------- ---------- -----
Total distributions............... (.61) (.55) (.78) (.60) (.62) (.58) (.52)
------- ------- ------- ------- ------- ---------- -----
Net asset value, end of period....... $ 11.06 $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 11.06 $11.19
------- ------- ------- ------- ------- ---------- -----
------- ------- ------- ------- ------- ---------- -----
TOTAL RETURN(b):..................... 4.28% 6.44% (1.82)% 11.62% 10.64% 4.03% 6.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $31,029 $40,119 $69,448 $75,515 $63,573 $ 72 $ 53
Average net assets (000)............. $35,605 $51,963 $73,606 $67,997 $60,751 $ 69 $ 32
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.43%(a) 1.34%(a) 1.28% 1.27% 1.31% 1.68%(a) 1.63%(a)
Expenses, excluding distribution
fees........................... .93%(a) .84%(a) .78% .77% .81% .93%(a) .90%(a)
Net investment income............. 4.37%(a) 5.10%(a) 4.89% 5.18% 5.58% 4.14%(a) 4.59%(a)
Portfolio turnover rate.............. 23% 28% 17% 38% 36% 23% 28%
<CAPTION>
August 1,
1994(d)
through
August 31,
1994
-----
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $11.09
-----
Income from investment operations
Net investment income................ .04(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........................... .88%(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-180
<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, 1996, 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, 1996 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, 1996, 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 14, 1996
B-181
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--98.6%
- ---------------------------------------------------------------------------------------------------------------------------------
Akron, Bath & Copley Twnshps., Hosp. Dist. Rev., Summa
Health, Systems Proj., Ser. A A 5.75% 11/15/08 $ 4,015 $ 3,921,812
Akron, Gen. Oblig., A 10.50 12/01/04 200 271,980
Akron, Gen. Oblig., F.S.A. Aaa 4.50 12/01/12 645 555,629
Allen Cnty. Wtr. & Swr. Dist., A.M.B.A.C. Aaa 7.80 12/01/08 1,000(c) 1,091,910
Bellefontaine City Sch. Dist., Gen. Oblig., Ser. 93,
A.M.B.A.C. Aaa Zero 12/01/08 485 250,366
A.M.B.A.C. Aaa Zero 12/01/09 390 188,304
A.M.B.A.C. Aaa Zero 12/01/10 390 175,785
A.M.B.A.C. Aaa Zero 12/01/11 465 196,960
Brecksville Broadview Heights City Sch. Dist., F.G.I.C. Aaa 6.50 12/01/16 1,000 1,076,150
Canton Water Works Sys., Gen. Oblig., A.M.B.A.C. Aaa 5.85 12/01/15 700 700,497
Carroll Cnty. Econ. Dev. Rev., Great Trail Lake Ctr.,
F.H.A. NR 11.75 8/01/14 660 756,043
Cleveland City Sch. Dist., Gen. Oblig.,
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/05 490 313,718
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/06 400 240,844
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/07 315 178,173
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 12/01/08 550 283,921
Cleveland Parking Facs. Rev., Ref., Ser. 96, M.B.I.A. NR 5.50 9/15/22 3,000 2,865,000
Columbus Citation Hsg. Dev. Corp., Mtge. Rev., F.H.A. AA(b) 7.625 1/01/22 1,885(c) 2,226,110
Columbus, Gen. Oblig., Mun. Arpt. No. 32 Aaa 7.15 7/15/06 435 469,722
Cuyahoga Cnty. Hosp. Rev., Meridia Health Sys. A1 6.25 8/15/24 1,500 1,490,145
Dayton, Gen. Oblig., M.B.I.A. Aaa 7.00 12/01/07 480 555,077
Dover Mun. Elec. Sys. Rev., F.G.I.C. Aaa 5.95 12/01/14 1,000 1,014,450
Dublin City Sch. Dist., Franklin, Delaware & Union Co.,
A.M.B.A.C Aaa Zero 12/01/05 1,000 624,140
East Cleveland Rev., Local Gov't. Fund Notes NR 7.90 12/01/97 595 617,247
Franklin Cnty. Hosp. Rev., Holy Cross Hlth. Sys., Ser. B,
A.M.B.A.C. Aaa 7.65 6/01/10 2,500(c) 2,797,375
Franklin Cnty. Pub Impvt., Ser. 93 Aaa 5.375 12/01/20 1,690 1,598,622
Gahanna Jefferson City Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 445 214,859
Greene Cnty. Swr. Sys. Rev.,
A.M.B.A.C. Aaa Zero 12/01/08 450 232,299
Wtr. Sys. Rev., Ser. A, F.G.I.C. Aaa 6.125 12/01/21 1,000 1,024,080
Guam Pwr. Auth. Rev., Ser. A BBB(b) 6.75 10/01/24 3,110 3,185,106
Hamilton Cnty. Gas Sys. Rev., Ser. A, M.B.I.A. Aaa 4.75 10/15/23 3,250 2,724,117
Hilliard Sch. Dist., Cap. Apprec. Impvt.,
Ser. A, F.G.I.C. Aaa Zero 12/01/09 2,855 1,378,480
Ser. A, F.G.I.C. Aaa Zero 12/01/10 2,855 1,286,834
Logan Hocking Local Sch. Dist., Hocking, Perry & Vinton
Co., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 650 313,840
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-182
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Lucas Cnty. Hosp. Rev., Promedica Healthcare Oblig.,
Ser. 96, M.B.I.A. Aaa 5.75% 11/15/09 $ 3,000 $ 3,033,840
Toledo Hosp., Impvt. & Ref., M.B.I.A. Aaa 5.00 11/15/13 1,000 910,500
Marion Cnty. Hosp. Impvt. Rev., Ref., Comn. Hosp., Ser. 96 BBB+(b) 6.375 5/15/11 2,000 1,978,000
Marysville Village Sch. Dist., Gen. Oblig., Sch. Impvt.,
M.B.I.A. Aaa Zero 12/01/15 865 283,435
Miami Cnty. Hosp. Fac. Rev., Ref & Impvt., Upper Valley
Med. Ctr. Baa 6.375 5/15/26 1,000 967,330
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/05 1,000 632,140
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/07 500 279,095
Mount Vernon City Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 575,950
Newark, Ltd. Tax Gen. Oblig., Wtr. Impvt., A.M.B.A.C. Aaa Zero 12/01/06 805 472,253
Ohio St. Air Quality Dev. Auth. Rev., Poll. Ctrl.,
Cleveland Elec. Co. Proj., F.G.I.C. Aaa 8.00 12/01/13 2,500 2,927,100
Edison Proj., Ser. A, F.G.I.C Aaa 7.45 3/01/16 3,750 4,106,250
Ohio St. Bldg. Auth.,
Columbus St. Bldg. Proj., Ser. A A 7.75 10/01/07 750(c) 815,100
Das Data Ctr. Proj., A1 6.00 10/01/08 615 651,334
St. Correctional Facs., Ser. A Aaa 8.00 8/01/06 600(c) 642,768
St. Correctional Facs., Ser. A Aaa 8.00 8/01/08 500(c) 535,640
Workers Comp. - W. Green Bldg. A A1 4.75 4/01/14 2,740 2,422,544
Ohio St. Higher Edl. Fac. Comn. Rev.,
Case Western Resv. Univ., Ser. A Aa 7.70 10/01/18 965(c) 1,015,286
Case Western Resv. Univ., Ser. B Aa 7.70 10/01/18 35 36,747
Case Western Resv. Univ., Ser. B Aa 6.50 10/01/20 750 823,845
Oberlin Coll. NR 7.375 10/01/14 1,000(c) 1,098,450
Ohio St. Mtge. Rev., Ser. A, F.H.A. AAA(b) 8.15 8/01/17 3,500 3,690,190
Ohio St. Wtr. Dev. Auth. Rev., Ser. I Aaa 7.50 12/01/08 1,200(c) 1,287,936
Ottawa Cnty. San. Sew. Sys. Rev., Danbury Proj.,
A.M.B.A.C. Aaa 7.375 10/01/14 1,000(c) 1,099,970
Oxford Hosp. Facs. Rev., 1st Mtge., McCullough Hyde Mem. NR 8.00 5/01/17 1,445 1,475,258
Pickerington Local Sch. Dist.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/08 890 459,436
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 935 451,446
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/13 525 196,434
Puerto Rico Aqueduct & Swr. Auth. Rev., Ser. A Baa 7.875 7/01/17 1,000(c) 1,084,780
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O Baa1 5.00 7/01/12 1,720 1,542,358
Puerto Rico Hwy. & Trans. Auth. Rev., M.B.I.A. Aaa 5.50 7/01/15 5,000 4,896,300
Puerto Rico Ind. Tourist Edu. Med. & Envir. Ctrl. Facs.,
Mut. Oblig. Grp. Proj., M.B.I.A. Aaa 6.25 7/01/24 2,500 2,588,275
Puerto Rico Pub. Bldgs. Auth. Rev., Gtd. Pub. Ed. & Hlth.
Facs., Ser. J Baa1 Zero 7/01/06 3,000 1,752,600
Puerto Rico Reg. Linked Bonds, M.B.I.A. Aaa 5.782(d) 7/01/08 2,000 2,044,220
Richland Cnty. Madison Swr. Impvt., A.M.B.A.C. Aaa 6.95 12/01/11 500 563,475
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-183
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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(c) $ 2,169,960
Scioto Cnty. Hosp. Fac. Rev., Portsmouth Proj., Ser. B,
M.B.I.A. Aaa 7.625 5/15/08 2,290 2,444,323
Sugarcreek Local Sch. Dist., Cap. Apprec., F.G.I.C. Aaa Zero 12/01/08 500 258,110
Summit Cnty. Ind. Dev. Rev., Century Products, Gerber
Foods A1 7.75 11/01/05 3,250 3,362,937
Toledo-Lucas Cnty. Convention & Visitors Ctr., Lodging
Tax,
Ser. 96, M.B.I.A. Aaa 5.70 10/01/15 2,000 1,974,700
Trumbull Cnty., Correctional Facs.,
Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/08 1,250 645,275
Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/09 1,250 603,537
Univ. of Puerto Rico Revs., Cap. Apprec. Ref. Ser. N,
M.B.I.A. Aaa Zero 6/01/13 4,245 1,661,026
Univ. of Toledo, Gen. Receipts, M.B.I.A. Aaa 7.70 6/01/18 1,000(c) 1,075,920
Virgin Islands Pub. Fin. Auth. Rev., Ref. Matching Loan
Notes,
Ser. A NR 7.25 10/01/18 1,000 1,061,340
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 415 437,701
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 1,000 1,042,980
Woodmore Indpt. Sch. Dist., Gen. Oblig.,
A.M.B.A.C. Aaa Zero 12/01/05 490 305,829
A.M.B.A.C. Aaa Zero 12/01/06 480 281,592
------------
Total Investments--98.6%
(cost $94,461,170; Note 4) 99,485,110
Other assets in excess of liabilities--1.4% 1,407,962
------------
Net Assets--100% $100,893,072
------------
------------
</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.S.A.--Financial Security Assurance.
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 year end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-184
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1996
<S> <C>
Investments, at value (cost $94,461,170).................................................................. $ 99,485,110
Receivable for investments sold........................................................................... 5,147,374
Interest receivable....................................................................................... 1,425,275
Receivable for Series shares sold......................................................................... 102,424
Deferred expenses and other assets........................................................................ 3,129
---------------
Total assets........................................................................................... 106,163,312
---------------
Liabilities
Payable for investments purchased......................................................................... 4,851,516
Payable for Series shares reacquired...................................................................... 152,369
Accrued expenses and other liabilities.................................................................... 114,901
Dividends payable......................................................................................... 83,591
Management fee payable.................................................................................... 38,982
Distribution fee payable.................................................................................. 26,181
Deferred trustee's fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 5,270,240
---------------
Net Assets................................................................................................ $ 100,893,072
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 86,220
Paid-in capital in excess of par....................................................................... 95,924,825
---------------
96,011,045
Accumulated net realized loss on investments........................................................... (141,913 )
Net unrealized appreciation on investments............................................................. 5,023,940
---------------
Net assets, August 31, 1996............................................................................... $ 100,893,072
---------------
---------------
Class A:
Net asset value and redemption price per share
($49,851,411 / 4,261,715 shares of beneficial interest issued and outstanding)...................... $11.70
Maximum sales charge (3.0% of offering price).......................................................... .36
---------------
Maximum offering price to public....................................................................... $12.06
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($50,997,864 / 4,356,540 shares of beneficial interest issued and outstanding)...................... $11.71
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($43,797 / 3,741 shares of beneficial interest issued and outstanding).............................. $11.71
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-185
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................. $ 6,617,678
---------------
Expenses
Management fee........................... 546,058
Distribution fee--Class A................ 51,205
Distribution fee--Class B................ 289,546
Distribution fee--Class C................ 730
Custodian's fees and expenses............ 85,000
Transfer agent's fees and expenses....... 72,000
Reports to shareholders.................. 46,000
Registration fees........................ 40,000
Audit fees and expenses.................. 12,300
Legal fees and expenses.................. 10,000
Trustees' fees........................... 3,900
Miscellaneous............................ 6,397
---------------
Total expenses........................ 1,163,136
Less: Management fee waiver.............. (54,606)
Custodian fee credit.................. (9,783)
---------------
Net expenses.......................... 1,098,747
---------------
Net investment income....................... 5,518,931
---------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 835,052
Financial futures transactions........... (660,186)
---------------
174,866
---------------
Net change in unrealized appreciation on:
Investments.............................. (1,647,381)
Financial futures contracts.............. 91,875
---------------
(1,555,506)
---------------
Net loss on investments..................... (1,380,640)
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,138,291
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income........ $ 5,518,931 $ 6,137,178
Net realized gain on
investment
transactions.............. 174,866 807,146
Net change in unrealized
appreciation of
investments............... (1,555,506) 868,206
----------------- ---------------
Net increase in net assets
resulting from
operations................ 4,138,291 7,812,530
----------------- ---------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment income
Class A................... (2,697,227) (1,643,462)
Class B................... (2,817,228) (4,490,813)
Class C................... (4,476) (2,903)
----------------- ---------------
(5,518,931) (6,137,178)
----------------- ---------------
Distributions from net
realized gains
Class A................... (301,130) --
Class B................... (344,409) --
Class C................... (787) --
----------------- ---------------
(646,326) --
----------------- ---------------
Series share transactions (net
of share conversions) (Note
5)
Net proceeds from shares
sold...................... 4,188,171 6,780,605
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 3,659,786 3,526,725
Cost of shares reacquired.... (18,991,116) (20,943,985)
----------------- ---------------
Net decrease in net assets
from Series share
transactions.............. (11,143,159) (10,636,655)
----------------- ---------------
Total decrease.................. (13,170,125) (8,961,303)
Net Assets
Beginning of year............... 114,063,197 123,024,500
----------------- ---------------
End of year..................... $ 100,893,072 $ 114,063,197
----------------- ---------------
----------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-186
<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
fourteen 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 objectives of obtaining the maximum amount of income
exempt from federal and applicable state and city income taxes with the minimum
of risk by investing primarily 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 preparation of its financial statements.
Security 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 services, 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, 1996.
Securities Transactions and Net 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. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal Income tax purposes, each Series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- --------------------------------------------------------------------------------
B-187
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management LLC.
(``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, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $54,606 ($0.006 per share) for the year ended
August 31, 1996. The series is not required to reimburse PMF for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'') became distributor of the Class A shares of the Fund and
is serving the Fund under the same terms and conditions as under the arrangement
with PMFD. PSI is also the distributor of the Class B and Class C shares of the
Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$6,200 in front-end sales charges resulting from sales of Class A shares during
the fiscal year ended August 31, 1996. From these fees, PMFD and PSI paid such
sales charges to affiliated broker-dealers which in turn paid commissions to
sales-persons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1996, it
received approximately $116,600 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, 1996, the Series incurred fees of approximately $51,000 for the services of
PMFS. As of August 31, 1996 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, 1996 were $37,527,067 and
$46,951,299, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1996, was substantially the same as for financial reporting purposes and,
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $5,023,940 (gross unrealized appreciation--$5,296,158; gross
unrealized depreciation--$272,218).
The Fund elected to treat approximately $90,800 of net capital losses incurred
during the ten month period ended August 31, 1996 as having occurred in the
following fiscal year.
- ------------------------------------------------------------
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%. 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 quarterly basis approximately seven years after
purchase. A special exchange privilege is
- --------------------------------------------------------------------------------
B-188
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
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 year ended August
31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 43,750 $ 514,430
Shares issued in reinvestment of
dividends
and distributions................. 146,362 1,749,925
Shares reacquired................... (808,263) (9,588,893)
---------- ------------
Net decrease in shares outstanding
before conversion................. (618,151) (7,324,538)
Shares issued upon conversion from
Class B........................... 590,855 7,039,782
---------- ------------
Net decrease in shares
outstanding....................... (27,296) $ (284,756)
---------- ------------
---------- ------------
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 decrease in shares outstanding
before conversion................. (286,413) (3,350,233)
Shares issued upon conversion from
Class B........................... 4,170,236 48,050,779
---------- ------------
Net increase in shares
outstanding....................... 3,883,823 $ 44,700,546
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 304,364 $ 3,636,646
Shares issued in reinvestment of
dividends
and distributions................. 159,308 1,908,271
Shares reacquired................... (780,551) (9,284,600)
---------- ------------
Net decrease in shares outstanding
before conversion................. (316,879) (3,739,683)
Shares reacquired upon conversion
into Class A...................... (591,352) (7,039,782)
---------- ------------
Net decrease in shares
outstanding....................... (908,231) $(10,779,465)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
Class C
- ------------------------------------
Year ended August 31, 1996:
Shares sold......................... 3,157 $ 37,095
Shares issued in reinvestment of
dividends
and distributions................. 133 1,590
Shares reacquired................... (10,129) (117,623)
---------- ------------
Net decrease in shares
outstanding....................... (6,839) $ (78,938)
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-189
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------
Year Ended August 31,
----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of year...... $ 11.92 $ 11.72 $12.38 $11.69 $11.17
------- ------- ------ ------ ------
Income from investment operations
Net investment income................... .63(a) .65(a) .66 .69 .70
Net realized and unrealized gain (loss)
on investment transactions........... (.15) .20 (.66) .69 .52
------- ------- ------ ------ ------
Total from investment operations..... .48 .85 -- 1.38 1.22
------- ------- ------ ------ ------
Less distributions
Dividends from net investment income.... (.63) (.65) (.66) (.69) (.70)
Distributions from net realized gains (.07) -- -- -- --
------- ------- ------ ------ ------
Total distributions.................. (.70) (.65) (.66) (.69) (.70)
------- ------- ------ ------ ------
Net asset value, end of year............ $ 11.70 $ 11.92 $11.72 $12.38 $11.69
------- ------- ------ ------ ------
------- ------- ------ ------ ------
TOTAL RETURN(b):........................ 4.02% 7.59% (0.01)% 12.12% 12.60%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $49,851 $51,132 $4,749 $4,647 $2,095
Average net assets (000)................ $51,205 $29,904 $4,733 $2,904 $1,289
Ratios to average net assets:
Expenses, including distribution
fees.............................. .80%(a) .83%(a) .84% .84% .81%
Expenses, excluding distribution
fees.............................. .70%(a) .73%(a) .74% .74% .71%
Net investment income................ 5.27%(a) 5.50%(a) 5.45% 5.73% 6.34%
Portfolio turnover rate................. 35% 38% 20% 28% 37%
</TABLE>
- ---------------
(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 and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-190
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
---------------------------------------------------------- ---------------------------
Year Ended August 31, Year Ended August 31,
---------------------------------------------------------- ---------------------------
1996 1995 1994 1993 1992 1996 1995
------- ------- -------- -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 11.93 $ 11.73 $ 12.38 $ 11.70 $ 11.18 $11.93 $11.73
------- ------- -------- -------- -------- ----- -----
Income from investment operations
Net investment income................... .58(a) .60(a) .61 .65 .65 .55(a)
.57(a)
Net realized and unrealized gain (loss)
on investment transactions........... (.15) .20 (.65) .68 .52 (.15) .20
------- ------- -------- -------- -------- ----- -----
Total from investment operations..... .43 .80 (.04) 1.33 1.17 .40 .77
------- ------- -------- -------- -------- ----- -----
Less distributions
Dividends from net investment income.... (.58) (.60) (.61) (.65) (.65) (.55) (.57)
Distributions from net realized gains... (.07) -- -- -- -- (.07) --
------- ------- -------- -------- -------- ----- -----
Total distributions.................. (.65) (.60) (.61) (.65) (.65) (.62) (.57)
------- ------- -------- -------- -------- ----- -----
Net asset value, end of period.......... $ 11.71 $ 11.93 $ 11.73 $ 12.38 $ 11.70 $11.71 $11.93
------- ------- -------- -------- -------- ----- -----
------- ------- -------- -------- -------- ----- -----
TOTAL RETURN(b):........................ 3.61% 7.16% (0.33)% 11.58% 10.79% 3.36% 6.89%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $50,998 $62,805 $118,270 $121,937 $102,199 $44 $126
Average net assets (000)................ $57,909 $85,410 $121,365 $110,053 $ 96,178 $97 $ 61
Ratios to average net assets:
Expenses, including distribution
fees.............................. 1.20%(a) 1.22%(a) 1.24% 1.24% 1.21% 1.45%(a)
1.49%(a)
Expenses, excluding distribution
fees.............................. .70%(a) .72%(a) .74% .74% .71% .70%(a)
.74%(a)
Net investment income................ 4.87%(a) 5.27%(a) 5.05% 5.33% 5.73% 4.62%(a)
4.76%(a)
Portfolio turnover rate................. 35% 38% 20% 28% 37% 35% 38%
- ---------------
<CAPTION>
August 1,
1994(d)
Through
August 31,
1994
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $11.75
-----
Income from investment operations
Net investment income................... .05
Net realized and unrealized gain (loss)
on investment transactions........... (.02)
-----
Total from investment operations..... .03
-----
Less distributions
Dividends from net investment income.... (.05)
Distributions from net realized gains... --
-----
Total distributions.................. (.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>
(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 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-191
<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, 1996, 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, 1996 by correspondence with the custodian and brokers. 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, 1996, 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 14, 1996
B-192
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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--97.9%
- ----------------------------------------------------------------------------------------------------------------------------------
Allegheny Cnty. Arpt. Rev., Greater Pittsburgh Int'l.
Arpt., Ser. A, F.S.A. Aaa 6.60% 1/01/04 $ 1,000 $ 1,077,680
Allegheny Cnty. Higher Ed. Bldg. Auth. Rev.,
Robert Morris Coll., M.B.I.A. Aaa 7.00 6/15/08 1,000(f) 1,083,990
Univ. Rev., Duquesne Univ. Proj., A.M.B.A.C. Aaa 5.00 3/01/21 1,500 1,333,320
Allegheny Cnty. Hosp. Dev. Auth. Rev.,
Allegheny Gen. Hosp. Proj., Ser. A, M.B.I.A. Aaa 6.25 9/01/20 1,750 1,801,905
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/14 2,000 687,760
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/16 2,000 605,260
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/18 2,000 537,340
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/19 4,000 1,012,600
Presbyterian Univ. Hosp., Ser. C, M.B.I.A. Aaa 7.625 7/01/15 1,100 1,178,287
West Penn. Hosp. Hlth. Ctr. NR 8.50 1/01/20 2,000 2,177,140
Allegheny Cnty. Ind. Dev. Auth. Rev., USX Proj., Ser. A Baa3 6.70 12/01/20 4,500 4,558,815
Allegheny Cnty. Residential Fin. Auth., Mtge. Rev.,
G.N.M.A.,
Ser. F Aaa 9.00 6/01/17 375 392,272
Ser. Q Aaa 7.40 12/01/22 970 1,019,121
Allegheny Cnty. San. Auth. Swr. Rev.,
F.G.I.C. Aaa Zero 12/01/05 2,620 1,616,173
Ser. A, F.G.I.C. Aaa Zero 6/01/06 1,640 976,259
Allegheny Cnty., Ser. C-37, M.B.I.A. Aaa 7.30 12/01/10 1,500(f) 1,657,110
Allentown, A.M.B.A.C.,
Gtd. Wtr. Impvt. Aaa 5.65 7/15/10 775 786,121
Gtd. Wtr. Impvt. Aaa 5.65 7/15/10 325 329,664
Gtd. Wtr. Impvt. Aaa 5.65 7/15/10 330 334,736
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 1,256,996
Berks Cnty. Ind. Dev. Auth. Rev., Lutheran Home Proj. NR 6.875 1/01/23 1,500 1,469,100
Berks Cnty. Mun. Auth. Hosp. Rev., Reading Hosp. Med. Ctr.
Proj., M.B.I.A. Aaa 5.70 10/01/14 1,250 1,233,288
Bucks Cnty. Wtr. & Swr. Auth. Rev., Neshaminy Interceptor
Swr. Sys., F.G.I.C. Aaa Zero 12/01/15 2,175 691,694
Butler Cnty. Hosp. Auth. Rev., North Hills Passavant
Hosp., Ser. A, F.S.A. Aaa 7.00 6/01/22 1,000 1,078,640
Cambria Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev., Elec. Co.
Proj., Ser. A, M.B.I.A. Aaa 5.35 11/01/10 8,360 8,203,166
Central Greene Sch. Dist., Ser. AA, A.M.B.A.C. Aaa 5.25 2/15/24 1,000 918,460
Chartiers Valley Ind., Ref.-Friendship Vlg./South Hills NR 6.75 8/15/18 2,225 2,191,380
Chester Upland Sch. Auth., Sch. Rev. A(c) 6.375 9/01/21 1,000 1,014,650
Dauphin Cnty. Gen. Auth. Rev., B.I.G Aaa 7.40 1/01/06 70 72,213
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-193
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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. Auth. Hosp. Rev., Crozer-Chester Med. Ctr.,
M.B.I.A. Aaa 7.15% 12/15/05 $ 2,550 $ 2,842,358
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Proj., Ser.
A Aa3 8.10 12/01/13 2,000 2,082,980
Doylestown Hosp. Auth. Rev., Pine Run Retirement, Ser. A NR 7.20 7/01/23 3,180 3,206,394
Emmaus Gen. Auth. Rev., Local Gov't Bond, B.I.G.,
Ser. B Aaa 8.00 5/15/18 1,000(e) 1,069,920
Ser. C Aaa 7.90 5/15/18 1,250 1,344,125
Ser. E Aaa 7.90 5/15/18 2,000 2,150,600
Ser. F Aaa 7.90 5/15/18 1,600 1,720,480
Erie Higher Ed. Bldg. Auth., College Rev., Mercyhurst
Coll. Proj. AAA(c) 7.85 9/15/19 1,000 1,096,950
Great Valley Sch. Dist., Chester Cnty. Aa1 5.10 2/15/16 2,000 1,837,260
Greencastle Antrim Sch. Dist., M.B.I.A.,
Cap. Appreciation, Ser. B Aaa Zero 1/01/12 1,000 413,620
Cap. Appreciation, Ser. B Aaa Zero 1/01/13 1,000 384,340
Harrisburg Auth. Lease Rev., F.S.A. Aaa 6.625 6/01/13 1,500(f) 1,634,265
Harrisburg Redev. Auth. Rev., Cap. Impvt., Ser. A,
F.G.I.C. Aaa 7.875 11/02/16 900 964,980
Lancaster Cnty. Solid Waste Mgmt. Auth. Rev.,
Res. Rec. Sys. Landfill Rev. A 7.75 12/15/04 750 776,753
Res. Rec. Sys. Landfill Rev. A 7.875 12/15/09 500 519,005
Res. Rec. Sys. Rev., Ser. A A 8.375 12/15/04 1,000 1,050,560
Langhorne Manor Boro. Higher Ed. & Hlth. Auth Rev., Lower
Bucks Hosp. Ba 7.35 7/01/22 1,000 933,720
Latrobe Ind. Dev. Auth. Coll. Rev.,
St. Vincent Coll. Proj. Baa1 6.75 5/01/14 1,800 1,833,264
St. Vincent Coll. Proj. Baa1 6.75 5/01/24 1,500 1,507,200
Lehigh Cnty. Gen. Purpose Auth. Revs., Horizon Hlth. Sys.
Inc.,
Ser. A NR 8.25 7/01/13 500 525,375
Lower Pottsgrove Twnshp. Auth. Swr. Rev., Montgomery
Cnty., A.M.B.A.C.,
Ser. A Aaa Zero 11/01/13 1,155 422,776
Ser. A Aaa Zero 11/01/15 1,185 378,726
Luzerne Cnty. Ind. Dev. Auth. Rev., Gas & Water, Ser. B Baa1 7.125 12/01/22 6,000 6,268,860
Montgomery Cnty. Higher Ed. & Hlth. Auth. Hosp. Rev.,
Jeanes Hlth. Sys. Proj. NR 8.625 7/01/07 4,000(f) 4,616,360
Montgomery Cnty. Ind. Dev. Auth. Rev., Poll Ctrl.,
Philadelphia Elec. Co., Ser. A Baa1 7.60 4/01/21 1,000 1,065,930
Res. Recovery A-(c) 7.50 1/01/12 2,000 2,124,080
Montgomery Cnty. Redev. Auth., Multifamily Hsg., Ser. A NR 6.50 7/01/25 1,400 1,345,344
Northampton Cnty. Higher Ed. Auth. Rev.,
Lehigh Univ., M.B.I.A. Aaa 7.10 11/15/09 1,500 1,628,940
Moravian Coll. AAA(c) 8.20 6/01/11 2,095(f) 2,442,330
Moravian Coll., A.M.B.A.C. Aaa 6.25 7/01/11 2,195 2,353,347
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-194
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
Northeastern Hosp. & Ed. Auth. Coll. Rev., Kings Coll.
Proj., Ser. B BBB(c) 6.00% 7/15/18 $ 3,235 $ 2,980,147
Northumberland Cnty. Ind. Dev. Auth. Rev., Roaring Creek
Wtr. NR 6.375 10/15/23 1,000 921,590
Penn Hills, Ser. B, A.M.B.A.C. Aaa Zero 12/01/18 1,360 361,787
Penn Hills Twnshp., Gen. Oblig., A.M.B.A.C.,
Ser. A Aaa Zero 12/01/09 1,530 727,392
Ser. A Aaa Zero 6/01/10 1,535 704,857
Pennsylvania Convention Ctr. Auth. Rev., Ser. A, F.G.I.C. Aaa 6.00 9/01/19 5,320 5,516,893
Pennsylvania Econ. Dev. Auth.,
Macmillan Ltd. Partnership Proj. Baa2 7.60 12/01/20 3,000 3,291,930
Wst. Wtr. Treatment Rev., Sun Co. R & M Proj., Ser. A Baa1 7.60 12/01/24 4,500 4,945,185
Pennsylvania Hsg. Fin. Agcy.,
Sngl. Fam. Mtge. Aa 7.80 10/01/20 2,930 3,075,269
Sngl. Fam. Mtge. Aa 8.414(d) 4/01/25 2,100 1,968,750
Sngl. Fam. Mtge., Ser. X, F.H.A. Aa 8.10 10/01/10 780 785,858
Pennsylvania Infrastructure Invt. Auth. Rev., M.B.I.A. Aaa 5.625 9/01/14 1,500 1,458,675
Pennsylvania St. Cert. of Part., F.S.A. Aaa 6.25 11/01/06 1,900 2,017,971
Pennsylvania St. Higher Edl. Facs. Auth. Rev.,
Allegheny Coll., Ser. B BBB+(c) 6.00 11/01/22 2,000 1,883,620
Hahnemann Univ. Proj., M.B.I.A. Aaa 7.20 7/01/09 1,500 1,637,235
Hlth. Svs. Rev., Allegheny De. Vy. Oblig., Ser. A.,
M.B.I.A. Aa 5.75 1/01/22 1,500 1,457,040
Hlth. Svs. Rev., Univ. of PA., Ser. A Aaa 5.70 11/15/11 2,000 1,985,760
La Salle Univ., M.B.I.A. Aaa 7.70 5/01/10 1,100(f) 1,181,565
Med. Coll. of Penn., Ser. A Baa 7.50 3/01/14 2,350(f) 2,516,262
Philadelphia Arpt. Rev., Philadelphia Arpt. Sys. Baa1 9.00 6/15/15 2,000 2,048,060
Philadelphia Gas Wks. Rev. Baa1 7.70 6/15/11 215 245,309
Philadelphia Gas Wks. Rev.,
13th Ser. Baa1 7.20 6/15/98 500 521,450
13th Ser. Baa1 7.30 6/15/99 625 663,544
13th Ser. Aaa 7.70 6/15/21 3,430(f) 3,927,830
Philadelphia Gen. Oblig., M.B.I.A. Aaa 5.00 5/15/15 4,640 4,229,082
Philadelphia Hosps. & Higher Ed. Fac. Auth. Rev.,
Childrens' Hosp. Proj., Ser. A Aa 5.00 2/15/21 2,000 1,738,220
Childrens' Seashore House A-(c) 7.00 8/15/12 500 524,265
Childrens' Seashore House, Ser. A A-(c) 7.00 8/15/12 1,000 1,048,340
Childrens' Seashore House, Ser. A A-(c) 7.00 8/15/17 1,000 1,032,520
Grad. Hlth. Systems Ba 7.25 7/01/18 5,000 5,079,750
Philadelphia Ind. Dev. Auth. Rev.,
Inst. For Cancer Res. Proj., Ser. B AA-(c) 7.25 7/01/10 5,770 6,223,695
Nat'l. Brd. of Med. Examiners Proj. A+(c) 6.75 5/01/12 5,000 5,360,000
Philadelphia Pkg. Auth. Rev., Arpt. Pkg., A.M.B.A.C. Aaa 7.375 9/01/18 2,200 2,362,294
Philadelphia Redev. Auth. Rev., Home Impvt. Loan, Ser. A,
F.H.A. A1 7.40 6/01/08 295 311,691
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-195
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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 Wtr. & Swr. Rev.,
M.B.I.A. Aaa 6.25% 8/01/08 $ 2,000 $ 2,164,360
15th Ser., M.B.I.A. Aaa 6.875 10/01/06 700 750,547
Pittsburgh Stadium Auth. Rev., F.G.I.C. AAA(c) 7.50 10/15/01 500 512,230
Pittsburgh Urban Redev. Auth., Mtge. Rev.,
Ser. 87B A1 8.30 4/01/17 795 832,627
Ser. C, A.M.T. A1 6.55 4/01/28 1,635 1,629,458
Pittsburgh Wtr. & Swr. Auth., F.G.I.C.,
Ser. A Aaa 5.60 9/01/22 5,450 5,220,010
Wtr. & Swr. Sys. Rev. Aaa 6.50 9/01/13 5,000 5,500,950
Pottstown Boro. Auth., Swr. Rev., F.G.I.C. Aaa Zero 11/01/03 1,200 836,916
Puerto Rico Comnwlth.,
Gen. Oblig. Baa1 5.40 7/01/25 2,500 2,292,050
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 4,030 4,652,393
Gen. Oblig., F.S.A. Aaa 7.958(d) 7/01/20 4,250 4,149,062
Gen. Oblig., M.B.I.A. Aaa 5.50 7/01/08 3,340 3,397,916
Hwy. & Trans. Auth. Rev., Ser. Y Baa1 6.25 7/01/14 1,000 1,047,230
Pub. Impvt. AAA(c) 7.70 7/01/20 5,250(f) 5,931,870
Pub. Impvt. Rfdg., M.B.I.A. Aaa 7.00 7/01/10 720 831,197
Puerto Rico Elec. Pwr. Auth., Pwr. Rev., Ser. S, M.B.I.A. Aaa 7.00 7/01/06 1,800 2,073,834
Puerto Rico Port Auth. Rev., Spl. Facs. Amer. Airlines,
Ser. A. Baa3 6.25 6/01/26 1,475 1,463,392
Sayre Hlth. Care Facs. Auth. Rev., A.M.B.A.C.,
Cap. Asset Fin. Prog. C Aaa 7.70 12/01/13 500 546,070
Cap. Asset Fin. Prog. C Aaa 7.625 12/01/15 1,000 1,109,420
Scranton Pkg. Auth. Rev. A(c) 8.125 9/15/14 1,600(f) 1,716,768
Scranton-Lackawanna Hlth. & Welfare Auth. Rev.,
Univ. of Scranton Proj., Ser. C A-(c) 7.50 6/15/06 1,000(f) 1,114,730
Univ. of Scranton Proj., Ser. C A-(c) 6.50 3/01/15 2,250 2,347,492
So. Fork Mun. Auth. Hosp. Rev., Lee Hosp. Proj., Ser. A A-(c) 5.50 7/01/23 2,500 2,213,025
Unity Twnshp. Mun. Auth., Gtd. Swr. Rev., A.M.B.A.C.,
Cap. Appreciation Aaa Zero 11/01/11 1,035 435,425
Cap. Appreciation Aaa Zero 11/01/12 1,035 408,049
Cap. Appreciation Aaa Zero 11/01/13 1,035 378,851
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Gas Tax BBB(c) 7.70 10/01/04 1,000 1,077,620
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 1,950 2,069,613
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 1,000 1,054,700
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(f) 3,257,512
Washington Cnty. Hosp. Auth. Rev., Monongahela Valley
Hosp. A 6.75 12/01/08 2,750 2,858,790
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-196
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1996 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>
- ---------------------------------------------------------------------------------------------------------------------------------
West Mifflin San. Swr. Mun. Auth. Rev., F.G.I.C. Aaa 6.25% 8/01/10 $ 1,555 $ 1,670,459
York Cnty. Solid Waste & Refuse Auth., Ind. Dev. Rev.,
Res. Rec. Proj., Ser. C AA-(c) 8.20 12/01/14 1,000 1,060,840
------------
Total long-term investments (cost $222,556,850) 233,175,224
SHORT-TERM INVESTMENTS--0.7%
Philadelphia Hosps. & Higher Ed. Fac. Auth. Rev.,
F.R.D.D.,
Childrens' Hosp. of PA., Ser. 92B VMIG1 3.75 9/03/96 200 200,000
Childrens' Hosp of PA., Ser. 96A VMIG1 3.75 9/03/96 1,500 1,500,000
------------
Total short-term investments (cost $1,700,000) 1,700,000
OUTSTANDING CALL OPTION PURCHASED Expiration Contracts(g)
Date -----------
---------
U.S. Treasury Bond Futures expiring Nov. '96 @$112.00
(cost $72,807) NR -- 11/16/96 100 35,937
------------
Total Investments--98.6%
(cost $224,329,657; Note 4) 234,911,161
Other assets in excess of liabilities--1.4% 3,385,691
------------
Net Assets--100% $238,296,852
------------
------------
</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.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (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 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.
(f) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(g) One contract equals $1,000 face value.
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-197
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1996
<S> <C>
Investments, at value (cost $224,329,657)................................................................. $ 234,911,161
Cash...................................................................................................... 405,047
Interest receivable....................................................................................... 3,989,629
Receivable for investments sold........................................................................... 2,065,698
Receivable for Series shares sold......................................................................... 74,047
Deferred expenses and other assets........................................................................ 7,260
---------------
Total assets........................................................................................... 241,452,842
---------------
Liabilities
Payable for investments purchased......................................................................... 2,093,598
Payable for Series shares reacquired...................................................................... 355,529
Dividends payable......................................................................................... 207,733
Accrued expenses.......................................................................................... 182,657
Due to broker-variation margin............................................................................ 142,188
Management fee payable.................................................................................... 92,621
Distribution fee payable.................................................................................. 78,964
Deferred trustee's fees................................................................................... 2,700
---------------
Total liabilities...................................................................................... 3,155,990
---------------
Net Assets................................................................................................ $ 238,296,852
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 227,240
Paid-in capital in excess of par....................................................................... 226,563,470
---------------
226,790,710
Accumulated net realized gain on investments........................................................... 1,314,482
Net unrealized appreciation on investments............................................................. 10,191,660
---------------
Net assets, August 31, 1996............................................................................... $ 238,296,852
---------------
---------------
Class A:
Net asset value and redemption price per share
($69,658,688 / 6,641,845 shares of beneficial interest issued and outstanding)...................... $10.49
Maximum sales charge (3.0% of offering price).......................................................... .32
Maximum offering price to public....................................................................... $10.81
Class B:
Net asset value, offering price and redemption price per share
($167,809,191 / 16,003,102 shares of beneficial interest issued and outstanding).................... $10.49
Class C:
Net asset value, offering price and redemption price per share
($828,973 / 79,052 shares of beneficial interest issued and outstanding)............................ $10.49
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-198
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1996
<S> <C>
Income
Interest................................... $15,822,531
---------------
Expenses
Management fee............................. 1,253,004
Distribution fee--Class A.................. 59,995
Distribution fee--Class B.................. 949,510
Distribution fee--Class C.................. 5,277
Transfer agent's fees and expenses......... 190,000
Reports to shareholders.................... 141,000
Custodian's fees and expenses.............. 109,000
Registration fees.......................... 47,000
Audit fees and expenses.................... 12,300
Legal fees and expenses.................... 10,000
Trustees' fees............................. 3,900
Miscellaneous.............................. 3,708
---------------
Total expenses.......................... 2,784,694
Less: Management fee waiver................ (125,300)
Custodian fee credit................... (24,139)
---------------
Net expenses............................ 2,635,255
---------------
Net investment income......................... 13,187,276
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on:
Investment transactions.................... 2,187,217
Financial futures contracts................ 919,453
---------------
3,106,670
---------------
Net change in unrealized depreciation on:
Investments................................ (4,058,154)
Financial futures contracts................ (332,813)
---------------
(4,390,967)
---------------
Net loss on investments....................... (1,284,297)
---------------
Net Increase in Net Assets
Resulting from Operations..................... $11,902,979
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income........ $ 13,187,276 $ 13,870,072
Net realized gain (loss) on
investment transactions... 3,106,670 (508,005)
Net change in unrealized
appreciation/depreciation
of investments............ (4,390,967) 2,878,813
------------ ------------
Net increase in net assets
resulting from
operations................ 11,902,979 16,240,880
------------ ------------
Dividends to shareholders from
net investment income (Note
1)
Class A................... (3,346,434) (1,734,468)
Class B................... (9,806,020) (12,124,140)
Class C................... (34,822) (11,464)
------------ ------------
(13,187,276) (13,870,072)
------------ ------------
Series share transactions (net
of share conversions) (Note
5)
Net proceeds from shares
sold...................... 14,511,819 19,260,042
Net asset value of shares
issued in reinvestment of
dividends................. 7,333,818 7,902,987
Cost of shares reacquired.... (35,929,977) (44,342,507)
------------ ------------
Net decrease in net assets
from Series share
transactions.............. (14,084,340) (17,179,478)
------------ ------------
Total decrease.................. (15,368,637) (14,808,670)
Net Assets
Beginning of year............... 253,665,489 268,474,159
------------ ------------
End of year..................... $238,296,852 $253,665,489
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-199
<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
fourteen 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.
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 with respect to securities which the Fund currently
owns or intends to purchase. The Series' principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. 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 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 a writer of an option, may have no control over whether the
underlying securities 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 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. As of August 31, 1996, the Fund did not have any open
written options.
Securities Transactions and Net 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
- --------------------------------------------------------------------------------
B-200
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
recorded on the accrual basis. The Series amortizes premiums and original issue
discount paid on purchases of portfolio securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
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 LLC.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. PMF has agreed
to waive a portion (.05 of 1% of the Series' average daily net assets) of its
management fee, which amounted to $125,300 ($.006 per share for Class A, B and C
shares: .05% of average net assets). The Series is not required to reimburse PMF
for such waiver.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996, Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also the distributor of the Class B and Class C
shares of the Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period September 1, 1995 through January 1, 1996 with respect to Class A
shares, 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, 1996.
PMFD and PSI have advised the Series that they have received approximately
$24,600 in front-end sales charges resulting from sales of Class A shares during
the fiscal year ended August 31, 1996. From these fees, PMFD and PSI paid such
sales charges Pruco Securities Corporation, an affiliated broker-dealer, 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, 1996, it
received approximately $285,600 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
B-201
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA 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 fiscal year ended August
31, 1996, the Series incurred fees of approximately $122,800 for the services of
PMFS. As of August 31, 1996, approximately $9,800 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 fiscal year ended August 31, 1996 were $65,199,553 and
$82,899,570, respectively.
The cost basis of investments for federal income tax purposes was $224,297,076
and, accordingly, as of August 31, 1996 net unrealized appreciation of
investments for federal income tax purposes is $10,614,085 (gross unrealized
appreciation--$12,093,548; gross unrealized depreciation--$1,479,463).
At August 31, 1996 the Series purchased 175 financial futures contracts on the
Municipal Bond Index expiring September 1996. The value at disposition of such
contracts was $19,169,531. The value of such contracts on August 31, 1996 was
$18,779,687 thereby resulting in an unrealized loss of $389,844.
The Series has fully utilized its capital loss carryforward of approximately
$1,452,000. The Series has elected to treat net capital losses of approximately
$1,202,900 incurred in the ten month period ended August 31, 1995 as being
incurred in the current fiscal year.
- ------------------------------------------------------------
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%. 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. A special exchange privilege is also available for
shareholders who qualify 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, 1996 and August 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 170,524 $ 1,815,672
Shares issued in reinvestment of
dividends........................ 174,484 1,854,233
Shares reacquired.................. (856,245) (9,076,849)
---------- ------------
Net decrease in shares outstanding
before conversion................ (511,237) (5,406,944)
Shares issued upon conversion from
Class B.......................... 2,346,430 24,852,900
---------- ------------
Net increase in shares
outstanding...................... 1,835,193 $ 19,445,956
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
Class B
- -----------------------------------
Year ended August 31, 1996:
Shares sold........................ 1,135,725 $ 12,092,210
Shares issued in reinvestment of
dividends........................ 513,704 5,464,148
Shares reacquired.................. (2,513,126) (26,746,007)
---------- ------------
Net decrease in shares outstanding
before conversion................ (863,697) (9,189,649)
Shares reacquired upon conversion
into Class A..................... (2,346,430) (24,852,900)
---------- ------------
Net decrease in shares
outstanding...................... (3,210,127) $(34,042,549)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-202
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<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)
---------- ------------
---------- ------------
Class C
- -----------------------------------
Year ended August 31, 1996:
Shares sold........................ 55,805 $ 603,937
Shares issued in reinvestment of
dividends........................ 1,449 15,437
Shares reacquired.................. (10,040) (107,121)
---------- ------------
Net increase in shares
outstanding...................... 47,214 $ 512,253
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-203
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year............................. $ 10.55 $ 10.42 $ 11.21 $10.55 $ 9.96
------- ------- ------- ------ ------
Income from investment operations
Net investment income............... .59(a) .60(a) .59 .62 .62
Net realized and unrealized gain
(loss) on investment
transactions..................... (.06) .13 (.68) .70 .59
------- ------- ------- ------ ------
Total from investment
operations.................... .53 .73 (.09) 1.32 1.21
------- ------- ------- ------ ------
Less distributions
Dividends from net investment
income........................... (.59) (.60) (.59) (.62) (.62)
Distributions from net realized
gains............................ -- -- (.11) (.04) --
------- ------- ------- ------ ------
Total distributions.............. (.59) (.60) (.70) (.66) (.62)
------- ------- ------- ------ ------
Net asset value, end of year........ $ 10.49 $ 10.55 $ 10.42 $11.21 $10.55
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):.................... 5.08% 7.35% (.82)% 12.86% 12.44%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....... $69,659 $50,696 $10,651 $9,342 $5,908
Average net assets (000)............ $59,995 $30,092 $10,315 $7,354 $4,439
Ratios to average net assets:
Expenses, including distribution
fees.......................... .75%(a) .80%(a) .75% .78% .81%
Expenses, excluding distribution
fees.......................... .65%(a) .70%(a) .65% .68% .71%
Net investment income............ 5.56%(a) 5.76%(a) 5.52% 5.69% 5.99%
Portfolio turnover rate............. 26% 19% 22% 13% 25%
</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 period 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 B Class C
------------------------------------------------------------ -----------------
Year Ended August 31, Year Ended August 31,
------------------------------------------------------------ -----------------
1996 1995 1994 1993 1992 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- ------ ------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $ 10.55 $ 10.42 $ 11.21 $ 10.54 $ 9.96 $10.55 $10.42
-------- -------- -------- -------- -------- ------ ------
Income from investment operations
Net investment income............... .55(a) .56(a) .55 .57 .58 .52(a) .53(a)
Net realized and unrealized gain
(loss) on investment
transactions..................... (.06) .13 (.68) .71 .58 (.06) .13
-------- -------- -------- -------- -------- ------ ------
Total from investment
operations.................... .49 .69 (.13) 1.28 1.16 .46 .66
-------- -------- -------- -------- -------- ------ ------
Less distributions
Dividends from net investment
income........................... (.55) (.56) (.55) (.57) (.58) (.52) (.53)
Distributions from net realized
gains............................ -- -- (.11) (.04) -- -- --
-------- -------- -------- -------- -------- ------ ------
Total distributions.............. (.55) (.56) (.66) (.61) (.58) (.52) (.53)
-------- -------- -------- -------- -------- ------ ------
Net asset value, end of period...... $ 10.49 $ 10.55 $ 10.42 $ 11.21 $ 10.54 $10.49 $10.55
-------- -------- -------- -------- -------- ------ ------
-------- -------- -------- -------- -------- ------ ------
TOTAL RETURN(b):.................... 4.66% 6.92% (1.22)% 12.54% 11.92% 4.41% 6.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..... $167,809 $202,633 $257,732 $263,752 $206,028 $ 829 $ 336
Average net assets (000)............ $189,902 $223,082 $266,594 $229,955 $186,113 $ 704 $ 223
Ratios to average net assets:
Expenses, including distribution
fees.......................... 1.15%(a) 1.17%(a) 1.15% 1.18% 1.21% 1.40%(a) 1.44%(a)
Expenses, excluding distribution
fees.......................... .65%(a) .67%(a) .65% .68% .71% .65%(a) .69%(a)
Net investment income............ 5.16%(a) 5.44%(a) 5.11% 5.29% 5.59% 4.91%(a) 5.14%(a)
Portfolio turnover rate............. 26% 19% 22% 13% 25% 26% 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 period 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, 1996, 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, 1996 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, 1996, 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 14, 1996
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 strategy 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.
[CHART]
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(Value of $1 invested on 12/31/25)
SMALL STOCKS -- $3,822
COMMON STOCKS -- $1,114
LONG-TERM BONDS -- $34
TREASURY BILLS -- $13
INFLATION -- $9
Source: Prudential Investment Corporation based on data from Ibbotson
Associates' EnCORR Software, Chicago, Illinois. 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
through 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
[CHART]
<TABLE>
<CAPTION>
Year '87 '88 '89 '90 '91 '92 '93
- ---------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7%
Mortgage Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8%
U.S. Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2%
U.S. High Yield Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1%
World Government Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1%
Difference between highest and lowest return
in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3
<CAPTION>
Year '94 '95
- ---------------------------------------------- --------- ---------
<S> <C> <C>
U.S. Treasury Bonds -3.4% 18.4%
Mortgage Securities -1.6% 16.8%
U.S. Corporate Bonds -3.9% 22.3%
U.S. High Yield Corporate Bonds -1.0% 19.2%
World Government Bonds 6.0% 19.6%
Difference between highest and lowest return
in percent 9.9 5.5
</TABLE>
- -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 (1926-1995)
[CHART]
- --------------
Source: Stocks, Bonds, Bills, and Inflation 1996 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 1926-1996. 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>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund-- Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC-1- are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. 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 more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since
1875. It insures or provides financial services to more than 50 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
MONEY MANAGEMENT. The Prudential is one of the largest pension fund
managers in the country, providing pension services to 1 in 3 Fortune 500 firms.
It manages $36 billion of individual retirement plan assets, such as 401(k)
plans. In July 1995, INSTITUTIONAL INVESTOR ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31, 1995, Prudential
had more than $314 billion in assets under management. Prudential Investments
(of which Prudential Mutual Funds is a key part) manages over $190 billion in
assets of institutions and individuals.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.-2-
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
- ---------------
- -1- PIC serves as the Subadviser to substantially all of the Prudential Mutual
Funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Fund, Inc. and BlackRock Financial
Management, Inc. as subadviser to The BlackRock Government Income Trust.
There are multiple subadvisers for The Target Portfolio Trust.
- -2- As of December 31, 1994.
III-1
<PAGE>
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
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.
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.-3- Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
- ---------------
- -3- As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
III-2
<PAGE>
TRADING DATA.-4- On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.-5- Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.-6-
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.-7-
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A-(compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.-8-
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ---------------
- -4- Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
- -5- Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
- -6- As of December 31, 1994.
- -7- As of December 31, 1994.
- -8- On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
APPENDIX IV--FIVE PERCENT SHAREHOLDER REPORT
As of October 4, 1996, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were:
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES (PERCENT)
- ----------------------------------------- ------------------------------------ ------------- ------------
<S> <C> <C> <C>
Florida Series (Class C) Randall E L Falck Ttee 53,473 (6.9%)
Randall E L Falck
Rev TR UA DTD 12/03/91
FBO Randall E L Falck
8049 Whisper Lake Ln W
Ponte Vedra FL 32082-3116
Mr Joseph R Rainwater Ttee 45,995 (6.0%)
Brown V Rainwater LVG
Trust #1 UA Dtd 06/21/86
PO Box 10875
Pensacola FL 32524-0876
Hawaii Income Series (Class B) Evelyn J Gender Ttee 61,332 (7.4%)
Amended and Restated Self
Trusted TR UA Dtd 09/03/87
619 Hunakai St
Honolulu HI 96816-4909
Erica K Hsiao Ttee 43,621 (5.3%)
Sidney C Hsiao &
Erica Hsiao Tr Ua Dtd 09/27/83
1434 Punahou St
Honolulu HI 96822-4754
Hawaii Income Series (Class C) Ralph S Tawata & 6,274 (5.3%)
Betty Y Tawata JT Ten
3150 Oahu Ave
Honolulu HI 96822-1246
John C Rapozo 10,806 (9.1%)
PO Box 681
Keaau Hi 96749-0681
Thomas K Tsobota Miyako 11,255 (9.5%)
Tsubota Co-TTEES
Thomas k Tsubota
Miyako I Tsubota
Revliv Tr UA DTD 04/19/90
911 11th Ave
Honolulu HI 96818-2240
Mrs Joyce W Borthwick & 7,039 (5.9%)
Mrs Amy T Shibuya JT Ten
123 Dowsett Ave
Honolulu HI 96818-1109
Irish O Eustace 6,550 (5.5%)
1930 Alaeloa St
Honolulu HI 96821-1019
</TABLE>
IV-1
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES (PERCENT)
- ----------------------------------------- ------------------------------------ ------------- ------------
<S> <C> <C> <C>
Maryland Series (Class C) Julien J Lavoie 713 (16.5%)
Marjorie G Lavoie JT Ten
13405 Beall Creek Ct
Potomac MD 20854-1119
Henry Nathan II & 1,416 (32.7%)
Elaine T Nathan JT TEN
6222 Roblynn Road
Laurel MD 20707-2635
Prudential Securities Inc. 2,095 (48.4%)
Erma N Ruble
Massachusetts Series (Class C) Anna R Mascott TTEE 2,953 (74.5%)
Anna R Mascott 1988
Revocable Trust UA DTD 01/19/88
358 Del Pond Drive
Canton MA 02021-2750
Richard E Gray & 563 (14.2%)
Dorothy E Gray JT TEN
234 Spring St
Medford MA 02155-2852
Ellen D Rothberg 297 (7.5%)
102 West Emerson St
Melrose MA 02176-3128
Michigan Series (Class C) Richard Coleman 2,515 (26.1%)
PO Box 243
Glenn MI 49416-0243
Ann P Franklin 2,532 (26.3%)
Don F Franklin JT TEN
707 Byron
Milford MI 48381
Lester L Fall Jr 1,445 (15.0%)
Cynthia D Fall JT TEN
12460 Lincoln
Burt MI 48417-9746
David D Verdier TTEE 1,366 (14.2%)
The David D Verdier Trust
UA DTD 06/02/90
3043 Mary Ave
E Grand Rapids MI 49506-3150
Hans J Pinagel & 1,750 (18.2%)
Jack Lukens JT TEN
12768 Marilyn Dr
Leroy MI 49655-9747
New Jersey Series (Class C) Linda Abrams 10,461 (5.7%)
209 Pipers Landing CT
Holmdel NJ 07733-2519
Martin Abrams 16,272 (8.9%)
209 Pipers Landing CT
Holmdel NJ 07733-2519
</TABLE>
IV-2
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES (PERCENT)
- ----------------------------------------- ------------------------------------ ------------- ------------
<S> <C> <C> <C>
Ralph J. Bisirri 18,769 (10.3%)
6 Lake Corson Lane
Marmora NJ 08223-1667
Dolores Truex 20,764 (11.4%)
126 Mayetta Landing Rd
West Creek NJ 08092-3100
Prudential Securities Inc. 19,999 (11.0%)
Arsenio Stabile
New York Series (Class C) Michael F Scheitel 5,158 (7.9%)
Dorothy E Scheitel Jt Ten
38 King Ave
Selden NY 11784-2338
Henry Hocker & 12,278 (18.7%)
Gloria Hocker Jt Ten
West Suffolk Ave
Central Islip NY 11722-2142
Shelley Fehrenbach 4,921 (7.5%)
2 Cherry Lane
Kings Point NY 11024-1122
Lawrence R Caponegro TTEE 10,775 (16.4%)
Caponegro Family Revocable
Tr Ua Dtd 06/29/92
47 Woodbury Road
Hauppauge NY 11788-4729
Kandala K. Chary MD & 3,330 (5.1%)
Vaidehi Chary JTTEN,
99 Roxbury Pk
East Amherst NY 14051-1769
Mrs Barbara Ann Moccia 4,445 (6.8%)
11 Byrd St
Rye NY 10580-2407
North Carolina Series (Class C) Steven J Sybert 2,945 (44.8%)
Rosalie B Sybert Jt Ten
4509 Coburn Ct
Charlotte NC 28277-2551
Howard G Hochman 1,005 (15.3%)
1200 Dwire Pl
Durhan NC 27706-2515
S J Black and Son Inc 1,031 (15.7%)
PO Box 1105
Monroe NC 28111-1105
Janet H Kean 1,371 (20.9%)
Thomas J Kean Recovable Livtr
UA DTD 10/30/87
17404 Randalls Ferry Rd #B
Norwood NC 28128-7460
Ohio Series (Class C) Robert M Beck 503 (13.2%)
339 Walnut Creek Pike
Circleville OH 43113-1051
</TABLE>
IV-3
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES (PERCENT)
- ----------------------------------------- ------------------------------------ ------------- ------------
<S> <C> <C> <C>
Cynthia L Weaver 437 (11.5%)
9813 Camelot St NW
Pickerington OH 43147-8579
Neal W Toth 438 (11.5%)
Ann D Toth JT TEN
108 Bayberry Dr
Northfield OH 44087-2622
Coleman Popp & 1,764 (46.2%)
Stella J Popp JT TEN
Box 601
Adena OH 43901-0601
Charles E Cartwright 654 (17.1%)
Janet L Cartwright
700 Swayne Dr
Coshocton, OH 43812-1051
Pennsylvania Series (Class C) Samuel J Occhipinti 9,273 (12.0%)
Jeanette Occhipinti JT TEN
324 42nd St
Pittsburgh PA 15201-1702
Thomas E Flack & 9,440 (12.2%)
Dorothy E Flack JT TEN
2504 Radcliffe Road
Brodmall PA 19008-2116
Barry L Joel & 4,260 (5.5%)
Tammy L Joel Jt Ten
7368 Beacon Hill Dr
Pittsburgh PA 15221-2569
Betty J Falvo 8,647 (11.2%)
1317 Clifton Rd
Washington PA 15301-8237
Herbert P Schenkel 18,613 (24.1%)
PO Box 427
Macunge PA 18062-0427
Robert J Niehaus & 4,037 (5.2%)
Jacqueline Niehaus Jt Ten
5960 NE 28th Ave
Ft Lauderdale FL 33308-2701
</TABLE>
IV-4
